They are shooting at guests, ' an official at the National Directorate of Security (NDS) spy agency told AFP.
Captain Tom Gresback, spokesman for the NATO-led Resolute Support mission in Afghanistan said they were also watching closely.
Some reports say the hotel had been hosting an IT conference.
"I don't know if the attackers are inside the hotel but I can hear gunfire from somewhere near the first floor", he said without giving his name.
"We are hiding in our rooms".
It is not clear how many people are inside the hotel.
Officials, however, would not confirm those reports, saying they were still gathering information.
Nasrat Rahimi, a deputy spokesman for the Interior Ministry, confirmed that there were four attackers.
"Some other guests have been rescued".
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Special forces were being lowered by helicopters onto the rooftop of the state-owned hotel, he added.
Afghan interior ministry spokesman Najib Danish said details of the raid, which came days after a United States embassy warning of possible attacks on hotels in the capital, were unclear.
After repeated attacks in Kabul, notably an incident last May in which a truck bomber killed at least 150 people outside the German embassy, security has been further tightened.
The hotel, located on a hilltop and heavily protected like most public buildings in the city, was previously attacked by Taliban fighters in 2011.
Saturday's attack is the second assault against the hotel. "Some parts of the building caught fire following the gunfire and grenade explosions", an eyewitness told Xinhua earlier.
"There were 40 of them in the hotel". We do not know who are the attackers.
Photo A view of the Intercontinental Hotel in Kabul in 2016. The hotel is known for hosting weddings, conferences, and political events. 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.
The State Department said it was monitoring the situation and was in contact with Afghan authorities to determine whether any U.S. citizens had been affected.
No-one has claimed responsibility for the attack.