Officials said the gunmen, dressed as medical personnel, had taken position on upper floors of the hospital and were engaging special forces units sent to the scene.
Security forces blocked off the area around the hospital, near a busy traffic intersection. As fighting went on, a second explosion was heard from the hospital.
"Our forces are there and there is heavy fighting," said defense ministry spokesman Dawlat Waziri. He said there was no immediate word on casualties.
The attack on the hospital, across the road from the heavily fortified U.S. embassy, underlines warnings by government officials that high profile attacks in Kabul are likely to escalate this year as the Taliban step up their insurgency.
"There is an ongoing terrorist attack in a hospital which tramples all human values," President Ashraf Ghani, said in impromptu remarks during a speech for International Women's Day.
"In all religions, a hospital is regarded as an immune site and attacking it is attacking the whole of Afghanistan."
The NATO-led Resolute Support mission said it was ready to assist Afghan security services.
One worker at the hospital, Abdul Qadir, told Reuters that he saw one gunman, dressed in a white doctor's coat, take out a concealed AK-47 assault rifle and open fire, killing at least one patient and one hospital worker.
He also heard firing from several other points of the hospital, which treats military casualties from around Afghanistan.
The attack comes just a week after dozens were killed and wounded in coordinated attacks on a police station and an office of the intelligence service in Kabul.
That attack was claimed by the Taliban, who are seeking to expel foreign troops, defeat the U.S.-backed government and reimpose Islamic law after their 2001 ouster.
There was no immediate claim of responsibility. A Taliban spokesman said he had no immediate information.
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