There was no immediate claim of responsibility for the latest attack in the Afghan capital that followed a series of security warnings in recent days to avoid hotels and other locations frequented by foreigners.
"Four attackers are inside the building," an official at the National Directorate of Security (NDS) spy agency told AFP.
They are "shooting at guests", he said.
A guest hiding in a room told AFP he could hear gunfire inside the 1960s hotel.
"We are hiding in our rooms. I beg the security forces to rescue us as soon as possible before they reach and kill us."
His phone was switched off when AFP tried to contact him again.
Another official said the attackers were armed with small weapons and rocket-propelled grenades when they blasted their way into the hotel, which often hosts weddings, conferences and political gatherings.
"The first and second floors have been cleared and three wounded guests taken to hospital," interior ministry spokesman Nasrat Rahimi told AFP.
Afghan media is reporting multiple casualties in the attack.
The fourth floor of the hotel, which boasts several restaurants and a swimming pool, had been set on fire during the raid, the NDS official said.
Ministry of interior spokesman Najib Danish said one of the attackers inside the hotel had been killed.
"Our special forces are in the area," Danish told AFP.
"The operation will soon end and the attackers will be killed."
Authorities are already investigating how the attackers got past security which was taken over by a private company two weeks ago, Danish said.
"There was no special event going on in the hotel at the time of the attack."
Electricity inside the multi-storey hilltop hotel was cut after an initial explosion, a counterterrorism source said.
Security at the Intercontinental, which is not part of the global InterContinental chain, is relatively light compared with other high-end hotels in Kabul.
A conference on Afghanistan-China relations was held in one of its function rooms earlier today, attended by the Chinese embassy's political counsellor Zhang Zhixin.
An AFP reporter who attended the conference passed through two vehicle security checkpoints. At the entrance to the building there was a physical inspection that could be easily evaded by scaling a low-level barrier and entering the lobby.
Security in Kabul has been tightened since May 31 when a massive truck bomb ripped through the diplomatic quarter, killing some 150 people and wounding around 400 others - mostly civilians. No group has yet claimed that attack.
The Islamic State group has claimed most of the recent attacks in the Afghan capital, but authorities suspect that the Taliban-affiliated Haqqani Network has been involved in some of the assaults.
The deadliest of the recent attacks happened at a Shiite cultural centre on December 29 when a suicide bomber blew himself up, killing more than 40 people.
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