Casualties feared after explosions go off near Iraqi embassy in Shar-e-Naw district of capital Kabul.

AVA_ DAESH group has claimed responsibility for a suicide car bomb attack near the Iraqi embassy in Kabul on Monday, the group's Amaq news agency reported.

Sources tell Al Jazeera that fighters are holed up in a building close to the embassy in Shar-e-Naw and a gun battle is under way.

"We heard two explosions near the Iraqi embassy and part of the building has been damaged," Mohsen Negaresh, a witness, told Al Jazeera.

Police confirmed the blast had taken place, but said they did not immediately have further information.

The Iraq embassy is located in a part of the city known as Shahr-e-Now, which lies outside the so-called "green zone" where most foreign embassies and diplomatic missions are located and which is heavily fortified with a phalanx of guards and giant cement blast walls.

By comparison, the Iraqi embassy is located on a small street in a neighbourhood dominated by markets and businesses.

The attack comes a week after at least 35 people were killed in a Taliban claimed suicide attack on government workers in Kabul and underlines the precarious security in Afghanistan as the US administration considers an overhaul of its policy in the region.