The attack was underway in Qala-e-Naw, the capital of Badghis province, having started around 12:40 pm (08:10 GMT) when a group of men, some wearing suicide vests, entered the hotel.
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"The attackers have entered a hotel, they are exchanging fire with the security forces," Aziz Bek, the head of the Badghis provincial council, told AFP.
"So far, three security forces have been killed, two wounded."
He added that children had been evacuated from nearby schools, and that explosions could be heard in the city.
Nasrat Rahimi, an interior ministry spokesperson, said a group of suicide bombers had entered a hotel and were shooting civilians.
Police had surrounded the building, he added.
Haroon Amir, a witness, said the attackers first hit a police checkpoint and then entered the hotel.
"The hotel is near the police headquarters and they are exchanging fire with the police," Amir told AFP.
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"Two big explosions have been heard in the city so far."
No group immediately claimed responsibility for the attack, which comes amid daily carnage in Afghanistan despite a US-led push for a deal to try to end the war.
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