Two French soldiers died and 17 "terrorists" were killed in a failed bid to free a French hostage in southern Somalia from Islamists holding him since 2009, the French defence minister said today.

The overnight operation was launched by France's elite DGSE secret service, Defence Minister Jean-Yves Le Drian said in a statement, adding that the raid was sparked by the "intransigence of the terrorists who have refused to negotiate for three and a half years and were holding Denis Allex in inhuman conditions."

But the Shebab extremists denied Le Drian's assertion that they had killed the hostage, a secret agent whose alias is Denis Allex, adding that they would decide his fate in two days and issuing a stern warning to Paris.

Two French soldiers "lost their lives (and) 17 terrorists were killed" in the battle, Le Drian said, offering the "most sincere condolences" to the dead soldiers' families and praising the men for their "courage and remarkable work".

He said the families of the dead soldiers had been informed. A Shebab statement said "in the end, it will be the French citizens who will inevitably taste the bitter consequences of their government's devil-may-care attitude towards hostages."

Sheikh Mohamed Abdallah, a local Shebab military commander, told AFP: "Mujahedeen fighters defeated the so-called commandos of the French government who tried to rescue a hostage, and they (the commandos) left the bodies of several of their own at the site of the attack."

Abdallah is the commander of Bulomarer, where the raid allegedly took place. The Shebab statement said the French carried away "several" of their dead.

"The helicopters attacked a house ... upon the assumption that Denis Allex was being held at that location, but owing to a fatal intelligence blunder, the rescue mission turned disastrously wrong.