Police officer Major Abdullahi Aden told Reuters the vehicle bomb said: 'They are fighting inside.
Al Jazeera's Mohammed Adow, reporting from Nairobi, Kenya, said at least three heavily armed Al-Shabab gunmen have gained entry to the Nasa-Hablod hotel and that fighting was still going on.
After the vehicle which detonated after crashing into the hotel gates, a second bomb in a minibus exploded at a nearby intersection.
The Al-Qaeda affiliated Shabaab claimed Saturday's bombings in a statement on its Andalus radio statin, saying its fighters had forced their way into the hotel.
Nasa-Hablod hotel is located near Somalia's presidential palace and frequently used by Somali politicians, including ministers and lawmakers.
According to Somali national news agency (SONNA), former MP Abdinasir Garane and former police commissioner of Daynile district Mohamed Yusuf were among the dead. Sporadic gunfire could be heard in the vicinity.
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Abdikadir Abdirahman, director of Mogadishu's Amin ambulance service, said 17 injured people had been carried away from the hotel blast.
Police Officer Ali Mohamed told Anadolu Agency over the phone that a vehicle bomb had targeted the Nasa-hablood hotel near the presidential palace; soon after another auto bomb exploded near the scene.
The US military has increased its strikes against al Shabaab this year with nearly 20 drone missions against the terror group.
"I was very lucky", he added.
The Shabaab has made attacks on hotels - commonly beginning with a suicide vehicle bombing followed by an invasion by gunmen - a regular strategy in its decade old battle to overthrow successive internationally-backed governments in Mogadishu.
The Shabaab lost their foothold in Mogadishu in 2011 but have continued their battle to overthrow the Somali government, launching regular attacks on military, government and civilian targets in the capital and elsewhere.