"We have found 12 bodies so far after we managed to access the building," a senior police officer told AFP.
"We are still combing the area with the help of anti-terrorism police and sniffer dogs in the ongoing search and rescue."
Eleven men and one woman were killed in the 3:30 am (local time) blast at the Bisharo lodge, a police source told AFP. The toll was confirmed in a government statement that said part of the building was collapsed by the blast.
"This attack is part of a series of attacks in which the Mujahideen are hunting down infidels" in northeast Kenya, the group said.
It is the second Shabaab strike in Mandera in three weeks. The previous one on October 6 killed six people at a gated residential building that mainly housed non-ethnic Somalis and non-Muslims, less than a kilometre from the volatile Somalia border town of Beled Hawa.
Mandera governor Ali Roba said the raids were designed to divide communities and destroy the economy.
Northeastern regional security boss Mohamoud Saleh said he suspected "local criminal gangs" of complicity since border security had been stepped up after the October 6 attack.
Another security source who did not want to be named told AFP local politics might also be involved, with some seeking to trigger a declaration of a state of emergency that would prevent elections taking place as scheduled next year.
The Shabaab has fought to overthrow the internationally-backed government in Mogadishu since 2007, but turned its sights on Kenya when the army was sent into Somalia in 2011 to fight the Islamic insurgents.
Since then the militants have targeted civilians in different parts of Kenya, including a dramatic assault on Nairobi's Westgate shopping mall in 2013 in which at least 67 people were killed.
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