A Rapid Action Battalion official told PTI that they were "awaiting final directives" from higher authorities to launch the operation.
Security officials issued instructions to people in the neighbourhood to stay indoors. No one was allowed on the streets in the vicinity of the restaurant, a police official said on the condition of anonymity.
Security forces, including Navy, Army and Air force personnel, were seen mobilising equipment in preparation for the operation.
Media personnel were moved out of the vicinity of the restaurant and escorted to a private medical hospital nearby. Ambulances and fire engines were kept on stand by.
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Italian ambassador to Bangladesh, Mario Palmer, said seven of his countrymen are being held captive.
However, the total number of hostages still remains uncertain.
A hostage was also seen tied up in a chair on the balcony of the restaurant.
At least nine terrorists shouting "Allahu Akbar" barged into the Holey Artisan Bakery, frequented by diplomats and expatriates, and opened indiscriminate fire at around 9:20 PM (local time) yesterday.
They then engaged in a fierce gun battle with Bangladesh security forces and hurled grenades at them. Two policemen were killed and 30 injured in the exchange.
Islamic State group claimed responsibility for the attack through its Amaq news agency, nearly four hours after the hostage crisis unfolded, according to the US-based SITE Intelligence group, which monitors jihadi activity online.
However, according to CNN, senior US officials believe that the attack has been probably carried out by Al Qaeda in Indian Sub-continent, which was declared as a terrorist organisation by the US only a day earlier.
The deceased policemen have been identified as officer
in-charge of nearby Banani police station, Salahuddin Ahmed and Additional Commissioner of Police Rabiul, identified only by his first name.
An Argentine national and a local escaped after taking refuge in a nearby house when the gunmen entered the restaurant.
Police said they have detained two employees of the eatery for questioning.
A kitchen staff of the restaurant, who managed to escape, said several armed men entered the restaurant around 8:45 PM and took the chief chef hostage, according to media reports.
"They set off several crude bombs triggering panic," he added.
Internet services have been restricted in the area following orders from higher authorities, internet service provider, Aamra, said.
Bangladesh Prime Minister Sheikh Hasina was in touch with security agencies over the incident. US President Barack Obama has been briefed by his top counter-terrorism official on the attack in Bangladesh, a White House official said.
The Muslim-majority Bangladesh has been fighting a wave of deadly attacks on religious minorities and secular bloggers by suspected Islamist militants.
Earlier today, a Hindu priest and a Buddhist leader were brutally hacked to death by machete-wielding Islamic State militants while another Hindu man survived a bid on his life.
The ISIS and al-Qaeda in Indian Sub-Continent have claimed responsibility for most of the attacks even though the government has denied their presence in the country.
Last month, police launched a nationwide anti-militancy crackdown to halt these attacks.