Bangladesh Border Guards are seen near Gulshan restaurant, after gunmen stormed a restaurant popular with expatriates in the diplomatic quarter of the Bangladeshi capital, in Dhaka, Bangladesh July 1, 2016. [Photo/Agencies]

SPORADIC GUNFIRE, CHAOS

Rizvi, the Bangladesh prime minister's adviser, said the hostage crisis began when local security guards in the diplomatic enclave noticed several gunmen outside a medical centre.

When the guards approached, the gunmen ran into the restaurant, which was packed with people waiting for tables, he added.

An employee who escaped told local television about 20 customers were in the restaurant at the time, most of them foreigners. The restaurant has a seating capacity of around 25 people.

Some 15 to 20 staff were working at the restaurant at the time, the employee said.

A police officer at the scene said that when security forces tried to enter the premises at the beginning of the siege they met a hail of bullets and grenades.

Television footage showed a number of police being led away from the site with blood on their faces and clothes. Heavily armed officers were seen milling on the street outside.

A resident near the scene of the attack told Reuters he heard sporadic gunfire nearly three hours after the attack began.

"It is chaos out there. The streets are blocked. There are dozens of police commandos," said Tarique Mir.

Italy's Foreign Minister Paolo Gentiloni said on Twitter he was closely following the situation in Dhaka, adding he was "anxious for Italians involved" and expressing solidarity with their families.

Prime Minister Matteo Renzi abruptly left a ceremony at the Colosseum in Rome on Friday evening to follow the hostage-taking incident, a source at his office said.

The U.S. State Department said all Americans working at the U.S. mission there had been accounted for. A spokesman said in Washington the situation was "very fluid, very live".

President Barack Obama has been briefed about the attack, the White House said.