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Despite the release of 225 people last night, the Peru hostage situation still appears to be at a stalemate. Lindsey Hilsum of Independent Television News has this update.

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LINDSEY HILSUM, Independent Television News: The first few of the 225 hostages were brought out around 10 o'clock last night, the Red Cross on hand for any emergency. Buses had been brought in when it looked as if the negotiation might be successful. Families were gathered outside in hope. Those released included foreign diplomats and some Peruvian foreign businessmen, those who the rebels said were not directly connected to the Peruvian government. The hostages, themselves, had negotiated their release with the rebels inside. The crowded and increasingly unsanitary conditions in the residence, as well as international pressure, played a part. A statement from the hostage takers was read out. It said this was a goodwill gesture for Christmas, but there'd be no more releases until the Peruvian government agreed to a dialogue and started to free the rebels' jailed leaders. The president of the local Chamber of Commerce was amongst those released. At home today, he said the rebels had not threatened their captives.

SAMUEL GLEISER, Released Hostage: Amazingly, yes. I would say that it was a concerted effort by the whole group to treat everybody very, very respectfully and never pushing themselves into situations where they could be, you know, have a reaction. It was studiously done. I think that's part of the strategy, and it worked.

LINDSEY HILSUM: At the British embassy released diplomat Roger Church was optimistic.

ROGER CHURCH, Released Hostage: As far as I'm aware there is--there is room for negotiation. I believe that the Peruvian government are prepared to negotiate as well, and that is the only way out. There is no other way out of it at all. There is not going to be, I'm sure, a violent solution to this at all. And I'm sure that it can be overcome peacefully.

LINDSEY HILSUM: But there was still a heavily armed police presence around the residents this morning as the remaining hostages prepare for what could be a protracted stay in captivity. The most difficult negotiations start now. The hostages who remain inside the Japanese embassy residence include Peruvian government ministers, legislators, and senior police officials, those who the rebels see as a legitimate target in their campaign against the Peruvian government. And the rebels say that if anyone else is to be released, the government must meet their demands. It must release their jailed comrades and start a dialogue on what they call peace and social justice. The guerrillas, known by the acronym MRTA, say they're acting on behalf of the poor. Here in Lima shanties, President Alberto Fujimori's policies of privatization and austerity are not seen as the motor for economic miracles but as the cause of increasing poverty. There's no running water. It's almost impossible to find a job. People may not support the rebels' methods but they're pleased that at least someone is drawing attention to their problems.

CESAR CRUZ, Unemployed Mechanic: (speaking through interpreter) These people are showing that nothing has been achieved with words. Talking, protesting has done nothing. Even when women went out on the streets banging pots and pans, they gained nothing. What happened? They were beaten with sticks and stones. How many people died? These people are showing what life is really like. We used to have bread. Then the loaf was cut in half. Now, we just eat crumbs.

MAGDALENA RIOJAS, Community Leader: (speaking through interpreter) It's all the government's fault. Fujimori should be blamed, not the rebels in the embassy. Fujimori is responsible for those hundreds of hostages. He must respond as a representative of Peru. The one who must go to the embassy is him, Fujimori.

LINDSEY HILSUM: Fujimori wasn't always unpopular with the poor. Ironically, one reason people voted for him in last year's election was that they thought he'd brought peace by subduing the Maoist guerrillas, Sendaro Luminosi. At the heat of their powers, Sendaro terrorized the poor in areas like this more than the rich. Attracting foreign investments and support has been the core of Fujimori ‘s economic policy. He's had some success in that and trade, especially with Japan, has increased. But the continuing embassy siege makes even this success look fragile.

OSCAR UGARTECHE, Professor of Economics: I think all investors are going to stop and think for a minute if the propaganda or the economic miracle has really been real, or was it just pure propaganda? That's one thing that is going to happen. The second thing that is going to happen is that maybe the propaganda, the terrorism was under control was also propaganda because today it's the MRTA. Tomorrow, is it going to be Sendaro again? Is it going to be a new group? The structural problems of violence in Peru must be solved. We must solve the problems of extreme poverty.

LINDSEY HILSUM: In the presidential palace with his advisers, Mr. Fujimori has first to solve the immediate problem of the remaining hostages. He's still saying there will be no capitulation to rebel demands. Until now, he's used force, not negotiation, to curtail the activities of Peru's armed troops. But this high profile embassy siege is a new guerrilla tactic here, and Mr. Fujimori may have to find a different style of response.

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