Two “powerful” blasts went off some 400 yards from the hideout, targeting a huge crowd of people and police officials who were witnessing the commando operation, police said.
“At least three people including a policeman were killed,” Sylhet police spokesman Zedan Al Musa told AFP.
More than 30 people were wounded including several army, police and elite security officers, Sylhet Medical College Hospital emergency medical officer Atiqul Islam told AFP.
Police have not blamed any group for the blasts, which occurred as commandos engaged in a day-long gun-fight with suspected militants holed up in a five-storey building.
The commandos backed by armoured personnel carriers launched the operation after a more than 30-hour standoff that began early Friday morning when police sealed off the place after suspected militants detonated small bombs.
Armed forces spokesman Colonel Rashidul Hasan said earlier that 78 people who were trapped in the building for more than a day were rescued by the commandos.
“The operation began at 7:00 am in the morning and is still going on,” he said, adding the commandos “exchanged fire” with the suspected militants who were confined in a ground-floor apartment of the building.
The spokesman could not say how many militants were in the building, but police said there were at least two including a woman.
“They are Islamist extremists,” police spokesman Musa.
Police used loudspeakers to ask the militants to surrender, but they refused to give up, Musa said.
The raid came after a series of suicide attacks on security camps by militants this month including one at a police checkpoint near the country's main international airport on Friday night.
Two of the attacks including Friday's blast in which the suicide attacker was killed were claimed by militant Islamic State group.
This month a police elite unit also stormed a building outside the port city of Chittagong, killing four members of the homegrown extremist group Jamayetul Mujahideen Bangladesh (JMB) including one woman.
A forensic doctor confirmed that Friday's attack was a suicide blast with the bomber apparently detonating a bomb tied to his body.
The attack was the third since last Friday, when a suicide bomber blew himself up at a camp for the country's elite security force near the airport.
IS has also claimed responsibility for a wave of killings since 2015 including for a major attack on a Dhaka cafe last year in which 22 people, including 18 foreign hostages, were killed.
The Bangladeshi government denies IS has any presence in the country, arguing instead that a new faction of JMB was behind that and other attacks.
