The militant Islamist group al Shabaab, which is trying to topple Somalia's central government, claimed responsibility for the attack and said its fighters had battled their way into the hotel after what they said was a suicide car bomb attack.

One police officer said the gunfire had died down about an hour and a half after the explosion.

"... but we believe the militants are still in the building. We have not confirmed the death toll, but there were many people inside, and there may be a high death toll," police captain Abdullahi Isak told Reuters by phone.

Major Mohamed Abdi, another police officer, had earlier told Reuters that local elders and lawmakers were meeting at the Hotel Asasey when the attack happened.

Abdiasis Abu Musab, al Shabaab's military operation spokesman, said the militant group had been behind the attack.

"First we targeted (the hotel) with a suicide car bomb and then armed mujahideen (guerrilla fighters) stormed the hotel.  We are still fighting inside the hotel," he said.

"There are many dead bodies inside the hotel, including a dead white man. We control the hotel now."

Hussein Nur, a shopkeeper in Kismayu, told Reuters: "There were many people including officials and elders, mostly from one clan, who were discussing the coming Kismayu election."

Nur was referring to elections in the city due sometime in August.

Al Shabaab was ejected from Mogadishu in 2011 and has since been driven from most of its other strongholds.

It was driven out of Kismayu in 2012. The city's port had been a major source of revenue for the group from taxes, charcoal exports and levies on arms and other illegal imports.

Kismayu is the commercial capital of Jubbaland, a region of southern Somalia still partly controlled by al Shabaab.

It remains a major security threat, with fighters frequently carrying out bombings in Somalia and neighbouring Kenya, whose troops form part of the African Union-mandated peacekeeping force that helps defend the Somali government.