Officials say the violence started with two explosions near the governor's office, followed by heavy fighting between militants - including suicide bombers - and security forces.
The fighting has spread to a market. At least two people have been killed.
Reports say Nato helicopters have been firing at the militants from the air.
Eyewitness Mohammad Dadu, a butcher at the market, told the BBC: ''I didn't have time to close my shop. I saw two dead bodies and four injured people with blood on their clothes."
The Taliban have claimed the attack.
Afghan militants have stepped up their attacks as Nato troops begin the handover of security to local forces in parts of the country.
On Wednesday the mayor of the volatile city of Kandahar was killed in a suicide attack.
Two weeks ago, President Hamid Karzai's influential half-brother, Ahmad Wali Karzai, was killed in the same city.
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