By Hasmik Mkrtchyan

YEREVAN (Reuters) - Authorities in Armenia called on gunmen holed up in a police station in the capital Yerevan to lay down their arms on Monday and release four people they were holding hostage.

The gunmen seized the police station and hostages on Sunday, killing a police officer and wounding two others in the process before demanding Armenians take to the streets to secure the release of jailed opposition politicians.

They released two hostages on Sunday and three more on Monday, the security service said. Negotiations to end the situation peacefully were under way.

The hostage-takers' main demand is to free Jirair Sefilian, an opposition leader whom authorities in the ex-Soviet republic have accused of plotting civil unrest. Sefilian was jailed in June over allegations of illegally possessing weapons.

The security service said talks were deadlocked so far.

"The armed group is refusing to release other hostages, including high-ranking officials, to lay down their weapons, or to surrender," the National Security Service said in a statement, saying the group posed a direct threat to society.

Vardan Yeghiazaryan, the deputy national police chief, and Yerevan deputy police chief Valery Osipyan were reported to be among the hostages.

"Law enforcement agencies are doing everything they can to end this peacefully, but in the circumstances it might not be enough," the security service said.

"That's why we again appeal to the members of the armed group ... to end their armed resistance. For now, there is still time and the opportunity to do that."

About 2,000 people gathered in the center of Yerevan demanding a peaceful resolution of the situation, the release of Sefilian, whom they called a political prisoner, and the resignation of President Serzh Sarksyan.

Protesters marched to the police station seized by the gunmen. Police detained some activists but released them later.

Sefilian, a former military commander, has accused Sarksyan of mishandling a long-running conflict between pro-Armenian separatists and the breakaway Azeri region of Nagorno-Karabakh.

A Moscow-brokered ceasefire halted four days of violence in the South Caucasus region on April 5, the worst flare-up in years, but sporadic shooting persists at night and some deaths have been reported.

The mountainous enclave is within Azerbaijan's borders, but populated mainly by ethnic Armenians who reject Azeri rule.

(Writing by Margarita Antidze; editing by Mark Heinrich)