The men - six road project workers and a dried-fish factory worker - were snatched at gunpoint in two separate incidents Monday near the town of Parang.
Maj. Gen. Ruben Rafael, commander of military forces on Jolo, said a group of civilians were ordered to take the heads to Parang by Muslim rebel commander Habier Malik, whose men have been battling troops since last week.
"This is a retaliation for the killing of one of their commanders," Rafael said. "This is a terrorist act that should be condemned by all."
He said the company which employed the road workers had refused to pay a ransom.
Malik heads a breakaway faction of the Moro National Liberation Front and is accused of launching mortar attacks on two marine camps in Jolo's Panamao township, along with the nearby town hall and residential areas, since Friday, sparking clashes with troops that have killed at least 21 people and displaced 45,000 villagers.
He also is suspected to have joined forces with the al-Qaida-linked Abu Sayyaf group. Military chief Gen. Hermogenes Esperon said Malik has provided sanctuary to Abu Sayyaf guerrillas and Indonesian militants.
The Abu Sayyaf, which is on a list of U.S. terrorist groups and has a reputation for bombings, mass abductions and beheadings, has been the target of a massive U.S.-backed military offensive on Jolo that started in August and has killed its top two leaders.
According to a source in the Russian Defence Ministry, Russia started deploying elite commando units in eastern Libya. Russian GRU officers, mercenaries and advisors have arrived in Libya