"We have seen around six people killed, most of them hotel security guards," said government security officer Mohamed Jama, adding that casualty numbers might rise.
A huge blast shook the area this afternoon sending a thick plume of smoke high into the air. The African Union force, AMISOM, which is fighting the Shebab insurgents, confirmed the explosion at the Jazeera Palace Hotel.
"There was a heavy explosion at the Jazeera Palace hotel, there are casualties," said police officer Abdirahman Ahmed.
He said the hotel, which has been attacked several times in the past by Islamist gunmen, had been "torn apart" by the blast.
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Photographs shared on social media showed one side of the multi-storey hotel shredded by the explosion.
Mohamed Moalim was inside the hotel when the bomb exploded.
"It was a truck loaded with explosives -- and the biggest ever (explosion) around this area," he said.
The diplomatic missions of both China and Qatar are based in the hotel.
The Shebab are fighting to overthrow Somalia's Western-backed government which is propped up and protected by the 22,000-strong AMISOM.