Most of the victims were civilians, a police spokesman said. Security forces were only able to end the siege on the hotel after around eight hours.
About 20 people were brought to safety and at least 14 people were injured in the attack, including six police officers, the spokesman said.
At the time of the attack, talks were being held in the hotel between local elders and the military officials to discuss stepping up measures against the Somali-based al-Shabaab militia, which has links to al-Qaeda.
Both groups are classified as terrorist organizations by the European Union, the United Nations and several African nations.
A car bomb was detonated in the neighbourhood and shots were heard after the explosion. Armed fighters stormed the hotel after the explosion, the region’s police chief told dpa.
The Islamist militia has been fighting in the country on the Horn of Africa for years, but has also carried out terrorist attacks in neighbouring Kenya and Uganda.
In recent weeks, al-Shabaab fighters have stepped up attacks on Somali military bases.
The militia controls parts of Somalia and frequently targets the capital, Mogadishu, attacking politicians, journalists and civil society figures.
Armed Islamists have stormed a hotel in the city of Beledweyne in central Somalia, and a siege is ongoing, police and witnesses have said.
The attack by al-Shabab began with a car bomb exploding, followed by gunmen entering the hotel, leading to intense clashes with security forces.
Police said at least four people had been killed, but witnesses told the BBC the death toll had risen to 10, with the security forces still battling the gunmen at the Qahira Hotel.
Al-Shabab, which is affiliated to al-Qaeda, has been waging a brutal insurgency in Somalia for more than two decades.
The raid on the hotel took place as politicians, security officials and traditional elders were meeting to discuss plans for an offensive against the group in central Somalia.
Beledweyne is about 335km (208 miles) north of the capital, Mogadishu, and is a strategic location in the campaign against al-Shabab.
Police officer Ali Mahad said many of those in attendance had been rescued, the AFP news agency reports
"Security forces are tackling several gunmen who are cornered in one part of the building," he is quoted as saying.
A federal lawmaker from Beledweyne, Dahir Amin Jesow, told the BBC that nearly seven gunmen were in the hotel.
"It will be necessary to bring in forces with heavy weaponry to neutralise the situation," he said.
Parts of the hotel had been reduced to rubble as government forces and gunmen exchanged fire, shopkeeper Ali Suleiman, who witnessed the attack, told the Reuters news agency.
"We first heard a huge blast followed by gunfire, then another blast was heard," he said.
It is unclear how many people have been wounded, but the lawmaker said they were trying to organise for aeroplanes to fly victims to Mogadishu for treatment.
