An army armoured vehicle moves along a street as police stormed the Holey Artisan restaurant after gunmen attacked it and took hostages early on Saturday in Dhaka, Bangladesh in this still frame taken from live video July 2, 2016. [Photo/Agencies]

SPIKE IN MILITANT ATTACKS

Militant violence has spiked in Bangladesh in the last 18 months. Attacks have tended to be on individuals, often using machetes, and the raid on the restaurant was a rare instance of a more coordinated operation.

Earlier on Friday, a Hindu priest was hacked to death at a temple in Jhinaidah district, 300 kms (188 miles) southwest of Dhaka.

Both Islamic State and al Qaeda have claimed responsibility for many of the killings, although local authorities say no operational links exist between Bangladeshi militants and international jihadi networks.

Bangladesh security officials say two local militant groups, Ansar-al-Islam and Jamaat-ul-Mujahideen, are behind the violence. Ansar pledges allegiance to al Qaeda, while Jamaat-ul-Mujahideen claims it represents Islamic State.

"The bottom line is Bangladesh has plenty of local, (often unaffiliated), militants and radicals happy to stage attacks in ISIS's name," said Michael Kugelman, South Asia associate at The Wilson Centre in Washington DC, using an acronym commonly used for Islamic State.

Islamic State had claimed more attacks in Bangladesh than in Pakistan or Afghanistan, he said.

SPORADIC GUNFIRE, CHAOS

Rizvi, the Bangladesh prime minister's adviser, said the hostage crisis began when local security guards in the diplomatic enclave noticed several gunmen outside a medical centre.

When the guards approached, the gunmen ran into the restaurant, which was packed with people waiting for tables, he added.

An employee who escaped told local television about 20 customers were in the restaurant at the time, most of them foreigners. The restaurant has a seating capacity of around 25 people.

Some 15 to 20 staff were working at the restaurant at the time, the employee said.

A police officer at the scene said that when security forces tried to enter the premises at the beginning of the siege they met a hail of bullets and grenades.

Television footage showed a number of police being led away from the site with blood on their faces and clothes. Heavily armed officers were seen milling on the street outside.

A resident near the scene of the attack told Reuters he heard sporadic gunfire nearly three hours after the attack began.

"It is chaos out there. The streets are blocked. There are dozens of police commandos," said Tarique Mir.

Italy's Foreign Minister Paolo Gentiloni said on Twitter he was closely following the situation in Dhaka, adding he was "anxious for Italians involved" and expressing solidarity with their families.

Prime Minister Matteo Renzi abruptly left a ceremony at the Colosseum in Rome on Friday evening to follow the hostage-taking incident, a source at his office said.

The U.S. State Department said all Americans working at the U.S. mission there had been accounted for. A spokesman said in Washington the situation was "very fluid, very live".

President Barack Obama has been briefed about the attack, the White House said.