Gunmen blew up a car bomb, sprayed gunfire in a crowded area and took hostages in a shopping mall in eastern Baghdad Monday, killing at least 12 people, police said.
A hospital official confirmed the death toll and said at least 36 people were also wounded during the attack in the Baghdad al-Jadida neighbourhood.
"They are inside the Zahrat Baghdad mall. When the security forces got too close, they killed three hostages," a police official said.
"We are taking a cautious approach now. We want this attack to end with the lowest possible number of casualties," the official said.
He described the mall as a building of four or five floors in a busy commercial area of Baghdad al-Jadida, a populous Shiite-majority area on the eastern edge of the Iraqi capital.
A large plume of black smoke could be seen billowing into the sky above the area where the mall is located.
An interior ministry source said an unspecified number of gunmen opened fire in the street after a car bomb exploded and briefly clashed with members of the security forces before entering the mall.
The official said the attackers had posted men on the roof.
One police official suggested there may have been more than one car bomb blast in the early stages of the attack.
Police said a counter-terrorism force from the intelligence services was on the scene and snipers posted on buildings around the mall.
"The attackers at one stage released at least nine hostages, women and children," the police colonel said.
There was no immediate claim of responsibility for the attack but a police source described the gunmen as "wearing Daesh-style clothes".
Daesh is an Arabic acronym for the Islamic State jihadist group that occupies parts of the country and is responsible for the vast majority of suicide attacks in Baghdad.
The group has carried out dozens of suicide car bomb attacks but Monday's hostage-taking would be the first of its kind since IS seized control of large parts of Iraq in 2014.
The spokesman for Baghdad Operations Command, Saad Maan, claimed the attack was over and the security forces "in full control of the situation" but other security sources insisted the standoff was ongoing.
"There is a major security deployment around the scene of the attack. Most of the main roads in this part of Baghdad have been closed," the police colonel said.
IS has suffered a number of military setbacks across Iraq in the past year. Security officials say fierce battles and relentless air strikes have depleted its manpower.
Analysts see that a reason for the drop in attacks targeting civilians in the capital which were an almost daily occurrence two years ago.
The Iraqi intelligence services announced on December they had detained 40 IS members as part of major swoop in the Baghdad area.
They described the arrests as the continuation of an operation that saw them bust a car bomb-making cell in Baghdad earlier in 2015.