The shootout follows a gun battle on Friday in which two Malaysian commandos and 12 followers of a self-described Philippine sultan were killed.
Malaysian Prime Minister Najib Razak had earlier expressed regret over Friday's bloodshed but said he had authorised police and armed forces to take whatever action necessary to end the impasse.
"I am very sad over the incident because what we had wanted to prevent, which is bloodshed, had actually happened," he said.
Malaysia and the Philippines were caught by surprise on February 12 when dozens of followers of the little-known sultan of Sulu sailed from their remote Philippine islands to press his claim to Sabah, which is on Borneo island.
Jamalul Kiram III, 74, says he is heir to the Islamic Sultanate of Sulu, which once controlled parts of Borneo, as well as southern Philippine islands.
Mr Hamza says the shootout was sparked when the intruders, who have been estimated at between 100 to 300 people, fired at security forces as they were tightening their cordon in a remote corner of Sabah.
"The intruders fired at us, then we returned fire," he said.
"As a result of the fire two of my men died, three were injured and... 12 intruders died."
"The operation is still going on," he said, adding that police continued to surround the area where about 100 people were left.