The gunmen were still holed up in the shopping centre in Baghdad al-Jadida, a police colonel said, adding that it was feared the attackers were wearing suicide belts.
A hospital official confirmed the death toll and said 14 people were also reported to have been wounded in the attack.
"They are inside the Zahrat Baghdad mall. When the security forces got too close, they killed three hostages," a police official said.
He described the mall as a building of four or five floors in a busy commercial area of Baghdad al-Jadida, a populous Shiite-majority area on the eastern edge of the Iraqi capital.
An interior ministry source said an unspecified number of gunmen opened fire in the street after a car bomb exploded and briefly clashed with members of the security forces before entering the mall.
"They completely control the mall right now, they have men on the roof," the official said.