A militant attack that freed hundreds of prisoners in Kandahar has created a "serious security situation" that adversely affects Canada's mission in Afghanistan, Prime Minister Stephen Harper said Thursday.

'We have a plan to pass full responsibility to the Afghan authorities by 2011. This is a setback in that regard.'—Prime Minister Stephen Harper

He was responding in Huntsville, Ont., to reporters' questions about the attack on June 13 that freed most of the prisoners at Kandahar's main prison, including about 400 suspected Taliban militants.

"I don't want to minimize: this is a serious security situation. It's a setback," Harper said.

"It's particularly a setback in our plans. As you know, we have a plan to pass full responsibility to the Afghan authorities by 2011. This is a setback in that regard," he said.

In March, Harper's Conservatives, with support from the Liberals, passed a motion that would keep Canadian soldiers in Kandahar until 2011. About 2,500 Canadian soldiers are currently deployed in Afghanistan, mostly in and around Kandahar, as part of the NATO-led International Security Assistance Force.

Harper said the good news was that the Afghan government responded quickly and directly, and that Afghan forces were working quite well with Canadian forces to deal with some of the consequences of the prison break.

The prime minister pointed out that the prison is an Afghan government institution, so security there is the responsibility of Afghan forces.

"But, obviously, this affects all of our operations," he said. "That's why we are working carefully with the Afghan government to address the consequences of this and, obviously, to deal with reconstruction of the prison."

56 Taliban confirmed dead in battle: Afghan Defence Ministry

As Harper spoke, Afghan and Canadian forces continued a military operation launched Wednesday against hundreds of insurgents gathered in villages outside Kandahar.

Brig.-Gen. Denis Thompson, the Canadian commandeer in Afghanistan, surveys the site of a battle along the Arghandab River on Thursday. (Alexander Panetta/Canadian Press)

Military officials declared victory over the Taliban on Thursday, saying they had almost cleared the Kandahar area of militant fighters in a 24-hour battle.

Still, the commander of the Canadian troops in Afghanistan warned that Afghan police must be supported in the region to ensure that Taliban members don't return.

"They've been defeated for the most part.… They're now trying to escape," Brig.-Gen. Denis Thompson said of the Taliban.

He said Afghan and Canadian soldiers are combing the region to find any remaining insurgents.

The Afghan National Army, under the guidance of the Canadian Forces, moved into the rural Arghandab region on Wednesday after reports emerged that hundreds of Taliban fighters were gathering there and preparing for possible attacks.

The Canadians and Afghans attacked on foot and by air, exchanging fire with Taliban fighters holed up in villages along the Arghandab River.

The Afghan Defence Ministry said 56 insurgents have been confirmed dead, while Kandahar's governor estimated hundreds of others were killed and wounded.

"We are finding more bodies, more wounded people," Gov. Asadullah Khalid said.

At least two Afghan soldiers died in the battle, and at least one civilian was killed. No Canadians died.

NATO downplays Taliban's capabilities

In the hours before the Canadian and Afghan troops launched their attack, local officials and residents had said upward of 650 insurgents had gathered in Arghandab and were seizing villages, bombing bridges and planting landmines in preparation for an attack on the city of Kandahar, just 15 kilometres away.

NATO downplayed the Taliban's capabilities, saying there were far fewer than 650 fighters and the city was never truly under threat. Still, NATO rushed 1,400 Afghan soldiers and equipment into the area, citing the battle as a good opportunity for the Afghan army to lead a mission.

"No large formation of insurgents were met or spotted. Only minor incidents occurred," NATO spokesman Maj.-Gen. Carlos Branco said Thursday. "The insurgents who were there were evidently not in the numbers or with the foothold that they have claimed."

Residents will be compensated: Canadian commander

An Afghan police officer guards a checkpoint Thursday between the city of Kandahar in the Arghandab district. (Alexander Panetta/Canadian Press)

Kandahar's governor, Khalid, said residents of Arghandab who fled their homes in the hours before the battle may be able to return within three days. The time frame will be crucial for most residents, who run fruit farms in the area, which is at the height of harvest season.

Thompson said people whose homes were destroyed in the battle will be compensated. He said it will be crucial to launch humanitarian projects in the area to help them get their lives back in order.

He said he hoped the military's ability to largely clear the region of the Taliban on Wednesday will restore residents' confidence that they are safe again. Thompson said that confidence was likely shaken by the surge of insurgents in Arghandab in recent days.

With files from the Canadian Press