There are unconfirmed reports that a number of hostages have been taken.
Local media is suggesting that several armed individuals have entered the Holey Artisan Bakery cafe in the Gulshan district of the city.
Two Italian citizens were killed, as well as Bangladeshi police officer Salahuddin Ahmed, and two police officers and a civilian were hospitalised in the attack, which took place in the Gulshan district of Dhaka.
Sick terror group the Islamic State (ISIS) have claimed responsibility for the attack via their so-called news agency, Amaq.
The incident started after nine gunman burst into the Holey Artisan Bakery Cafe in the area, which is the diplomatic heart of the South Asian city.
They opened fire, and while police and members of the Bangladeshi Rapid Action Battalion came to the scene, it is believed they are holding around 20 people hostage in the bakery.
One person who escaped said one gunman shouted "Allahu Akbar" during the attack.
The Rapid Action Batallion’s chief, Benazir Ahmed, said: “We believe we can resolve this peacefully.”
A spokesman for the Foreign Office said: “We are urgently seeking more information from the Bangladeshi authorities following a shooting in Dhaka and are monitoring the situation closely.”
The American Embassy tweeted "Please shelter in place and monitor news", while the American State department confirmed there was a hostage situation.