COTABATO CITY, Philippines (Reuters) -- Businessman Antonio Santos Jr. is having sleepless nights.

His family's property in the southern Philippine island of Mindanao is being taken over by groups of Muslims displaced by armed conflict.

From one small thatched hut over a year ago, several houses have sprouted like mushrooms in the property that Santos's mother inherited from her parents. "I don't know where these people are coming from," Santos told Reuters. "Every time I pass by the area, I notice new structures rising. It's really very frustrating because we really don't know how to stop them."

Teeming with natural beauty, exotic fruit and valuable minerals, Mindanao has been stricken by nearly 40 years of communist fighting and an Islamic insurgency aimed at creating a Muslim homeland in the largely Catholic country.

The Islamic conflict has killed more than 120,000 people and left around 350,000 homeless but long-running peace talks between Mindanao's largest Muslim guerrilla group and the government are in their final stages and both sides are hopeful of an informal agreement.

Officials in Cotabato City, however, are worried that a peace deal this year between Manila and the Moro Islamic Liberation Front (MILF), which would include provisions on ancestral rights, could encourage more squatters and stir up violence.

Explosive issue

"The ancestral domain issue is very sensitive," said Frances Cynthia Guiani-Sayadi, the attorney-general of the Autonomous Region in Muslim Mindanao, an area originally created under former dictator Ferdinand Marcos for Muslims in the south. "How do you handle ancestral rights claims on lands that had been individually titled without heating up old conflicts or creating new potential bloody feuds? "I hope the government will be very careful in handling this potentially explosive issue."

Santos sought help from Muslim community leaders, the local police and even the courts, but has been unsuccessful in trying to evict the squatters who were claiming the land as part of an ancestral domain.

His case was one of hundreds crowding the local courts in Cotabato City, the business hub of Muslim Mindanao, a region which has resisted external authority since the Spaniards colonized the Philippines in the 16th century.

Sayadi said criminal syndicates had been using Muslim ancestral rights to take over idle lands.

One gang was using a land title written in Spanish to claim about 54,000 hectares (135,000 acres) of property in Cotabato City, including areas where the city hall and a public school stand.

She said another group filed claims over a hill now occupied by the national police as part of ancestral lands by a non-Muslim tribal group called "Tiruray".

The city government has no exact figure for the number of land disputes but local officials said city courts were inundated with cases. Most of the complainants were rich Muslim and Christian landowners and ethnic Chinese traders.

Squatting is a common problem in urban centers across the Philippines, particularly in rebel-controlled areas in Mindanao, which are among the poorest in the country despite hosting potentially rich seams of minerals such as gold.