Witnesses reported hearing three explosions at the high-security Intercontinental Hotel in the Afghan capital during the assault, as gunmen got into the building sparking a shoot-out.
Among the guests staying at the hotel were Afghan government officials from across the country who were in Kabul for a conference Wednesday on the handover of power from foreign to Afghan security forces starting in July.
"It`s an attack on the Intercontinental Hotel," Kabul criminal investigations chief Mohammad Zahir told AFP. "Five to six gunmen have taken shelter inside the building of the hotel."
Zahir said that one suicide attacker had blown himself up so far and "a number" of police had been injured in the ongoing fighting, including he himself who had been shot in the leg.
There was no immediate detail on other casualties.
Interior ministry spokesman Siddiq Siddiqi confirmed that among those staying at the hotel were "guests from different provinces" who were due to attend Wednesday`s meeting.
An Afghan government official speaking on condition of anonymity said the insurgents inside the hotel were suspected of having suicide vests, machine guns and rocket-propelled grenades.
He added that guests in the hotel were being advised to stay in their rooms.
Shortly before the official spoke, an AFP reporter at the scene saw 10 to 15 armoured vehicles carrying Afghan National Army commandos entering the hotel compound.
Taliban spokesman Zabihullah Mujahid said the militant Islamist group was behind the attack.
He claimed that the militants had taken over the hotel, killing 50 guests including foreigners and officials, and had taken a further 300 hostage.
The Taliban frequently exaggerate their claims in relation to attacks.
AFP reporters close to the scene reported hearing at least three explosions at the scene and heavy machine gun fire.
Witness Sayed Hussain said he was inside the hotel compound when the attack started.
"I saw five to six men in civilian clothing armed with rifles who started shooting when they entered," he said, speaking close to the scene. "I lay down on the ground and soon after the police arrived."
He added that police and the attackers then traded fire for about 10 to 15 minutes before he heard a loud explosion.
Another man, who did not want to give his name, said he had been at the hotel intending to have dinner with friends when he heard gunshots and lay down in a muddy ditch to hide.
An Afghan guard was then shot nearby and fell on top of him, he said.
AFP reporters said that the hotel was in darkness after power in the area had apparently been cut. Traffic had also been diverted from the area and police were out in force with more arriving, he added.
The Intercontinental is one of Kabul`s best-known high-end hotels, boasting luxuries such as a swimming pool and a tennis court.
It is situated on a hill above the city and was established in 1969.
Security at most luxury hotels in Kabul was significantly stepped up after a 2008 attack on the Serena Hotel in the city centre killed seven people including at least three foreigners.
The attack comes weeks before foreign forces are expected to start withdrawals from Afghanistan, although security in the capital Kabul is already under the control of Afghan security forces.
Some 10,000 United States troops will leave Afghanistan this year, US President Barack Obama announced last week, ahead of the planned end of foreign combat operations at the end of 2014.
However, some experts question the ability of Afghan security forces to withstand a bloody Taliban insurgency which has run for nearly ten years.
There are currently around 150,000 foreign forces in Afghanistan, roughly 99,000 of them from the United States.
Kabul has been relatively stable in recent months despite frequent security alerts.
But nine people were killed earlier this month when three attackers, at least one of whom was in army uniform, armed with suicide vests and machine guns stormed a police station in the heart of the city. (*)
Editor: Kunto Wibisono
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