"A ban has been enforced barring entry of ordinary people within the vicinity of the building as final preparations were underway to flush the militants out from their den," a police officer told reporters on the scene.
At least three blasts were heard from inside the five- storey 'Atia Mahal' since 9:57 AM (local time). A huge blast near the building tilted it towards one side, the Daily Star reported, citing its photojournalist who was on the spot.
Sylhet-based 17 Infantry Division's Major General Anwarul Momen is leading the operation codenamed 'Twilight', which was assisted by police's SWAT and counter-terrorism units. The elite Rapid Action Battalion is also involved.
It was not immediately clear whether the blasts were bomb attacks carried out in support of the militants holed up in the building.
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Eyewitnesses said sounds of intermittent gunshots and explosions were heard, indicating militants' response to the security siege that continued for the last three days.
Counter-Terrorism and Transnational Crime chief Monirul Islam yesterday said they got information that JMB chief Musa along with some other JMB militants were in Sylhet, but it was not clear if they were the ones hiding in the building.
Yesterday, the first blast happened around 7:00 PM about 400 metres off the building where the militants were holed up. It targeted the onlookers and policemen.
The Dhaka Tribune quoted Sylhet Metropolitan Police ADC Jedan Al Musa as saying the blast was a "suicide attack".
Another blast took place in front of the hideout an hour later. Six people including two police officers were killed in twin blasts. The dead included two police inspectors and four onlookers, two of them being college students.
The target of the attack was security forces, it said.
This was the third attack in Bangladesh in eight days for which the ISIS claimed credit.
Elite Rapid Action Battalion (RAB) Intelligence Wing chief Lt Col Abul Kalam was seriously wounded in blasts and flown to Dhaka for treatment. Doctors said over 50 people were treated at a major state-run hospital in Sylhet alone.
Citing one of the injured people, bdnews24.Com said that the second blast took place when RAB and police personnel went to the spot after the first blast.
"We have enforced today the Section 144 strictly barring peoples' entry within the vicinity for security following the casualties," a police officer told newsmen.
Police had raided the building early morning Friday and cordoned off the area. TV channels were barred from broadcasting the operation "live".
The Operation Twilight was launched after a suicide bomber on Friday night blew himself up at the international airport in Dhaka in an attack claimed by the ISIS. It came a week after an identical attack on a RAB camp in Dhaka.
Bangladesh has been witnessing a spate of attacks on secular activists, foreigners and religious minorities since 2013. The country launched a massive crackdown on militants specially after the Dhaka cafe attack.
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