Amar Sinha, the Indian ambassador in Kabul, told AFP his embassy was in contact with up to five Indian nationals stuck inside the guesthouse who were safe.
No group immediately claimed responsibility for the attack on the Park Palace guesthouse, but the assault comes as the Taliban -- who have attacked such guesthouses in the past -- press their annual spring offensive.
"There was a concert planned to take place inside the Park Palace tonight, with foreigners, mainly Indian and Turkish guests, invited," an Afghan intelligence official told AFP on condition of anonymity.
A Park Palace employee, who barricaded himself in a room in the building, told AFP he heard several people screaming in the corridors as gunshots rang out.
The guesthouse was due to host a concert by well-known Afghan classical singer Altaf Hussain, with several VIPs invited, when the gunfire started, the employee told AFP by telephone.
The employee, who did not wish to be named, later managed to flee the Park Palace and said he saw at least five blood-covered bodies lying near the entrance.
The victims of that attack included veteran AFP reporter Sardar Ahmad, his wife, their five- and six-year-old children, another Afghan, two Canadians, an American and a Paraguayan.
Roads leading up to the Park Palace, frequented by foreigners and international aid agency workers, were blocked by a large number of security personnel who arrived after the attack, according to an AFP photographer at the scene.
Kabul police chief Abdul Rahman Rahimi, who was at the scene of the ongoing attack, said security forces were trying to get inside the guesthouse, but were facing heavy gunfire from the assailants.