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Government o fficials said at least two militants were also killed in the fighting.
Mali’s army continued to surround the Hotel Byblos in Sevare about 375 miles north of Bamako, fighting militants.
Smoke could be seen coming from the area near the hotel, according to one resident, who asked not to be named.
“This morning as I was leaving for work I heard shots and saw smoke coming from the Hotel Debo. The area is surrounded by soldiers who told us to return to our homes,” he said.
Hotel Debo sits next to the Byblos hotel and earlier reports from officials and residents indicated the fighting may have begun at the Debo.
The government said forces detained seven suspected militants.
Radhia Achouri, spokeswoman for the UN mission in Mali, confirmed a contractor was killed in the attack, without providing more details.
Defence ministry adviser Lt Col. Diarran Kone said at least six people were being held inside the hotel.
“The operation to free the hostages is ongoing,” he said.
The Ukrainian foreign ministry said the goal of the attackers was believed to be to take hostages from among the foreign citizens living in the hotel.
“According to the information available, a Ukrainian citizen may be among those foreign citizens taken hostage. In addition, three citizens of South Africa and a French citizen may be held hostage,” it said.
Nelson Kgwete, a spokesman for South Africa’s foreign ministry, said South African diplomats in Mali had been instructed to “liaise with the authorities in the region where the incident took place” to ascertain whether South African citizens were caught up in the attack.
Mali’s government and the UN mission in Mali both condemned the attack.
“The Government of the Republic of Mali condemns in the strongest terms this cowardly and barbaric attack against the peaceful citizens of Mali and friends present on the national territory,” it said.
Northern Mali fell under the control of jihadists back in 2012 but a French-led offensive ousted them from power in early 2013.
Remnants of the group have staged a number of attacks on UN peacekeepers and Malian forces, though the assault on a hotel known to be popular with UN pilots marks a serious escalation.
Sevare and the nearby town of Mopti in central Mali have long been the heart of the country’s tourism industry and had been spared from the attacks more common in the northern towns of Gao and Timbuktu.
Mali’s jihadist groups have been stepping up their attacks further south from their strongholds in the north.
In March, a masked gunman opened fire at a restaurant popular with foreigners in Bamako, the capital, killing five people. In June, gunmen killed three soldiers in a village near the Mauritania border.
The next day extremists briefly occupied a village near Ivory Coast. The extremist group Ansar Dine said it was behind those attacks.
A Dutch man, Swede and South African were abducted from a hostel in Timbuktu in November 2011. Dutch train driver Sjaak Rijke was rescued in April by French special forces in northern Mali.
There has been no word on Swede Johan Gustafsson and South African Stephen Malcolm who were abducted along with him. A German died in the attack.
Two French men were kidnapped from their hotel in north-eastern Mali in November 2011. Philippe Verdon was found killed in 2013, and Serge Lazarevic was released late last year.