The death toll of a hostage drama in Iraq has risen to 37, while 56 others were wounded when gunmen and security forces traded fire in down town Baghdad, an Interior Ministry source said.

"The latest report is 37 killed and 56 wounded," the source said on condition of anonymity.

The previous report from different sources in police, security forces and other officials said only seven were dead and 20 were injured.

Iraqi Defense Minister Abdul Qader al-Obeidi told reporters that the attack bore clear hallmarks of al-Qaida. He said the attackers were killed and the security forces arrested several suspects, without giving the exact numbers.

Some gunmen were not Iraqis, Obeidi said, adding the militants demanded the release of several terrorists in some Arab countries, including Egypt.

Sirens of ambulances can be heard by Xinhua correspondents around Baghdad city center as the wounded are being rushed to local hospitals.

Unidentified gunmen held some hostages, including a priest in a church located in central Baghdad Sunday afternoon after killing two guards in a stock market.

The attack took place at sunset when gunmen tried to storm the Baghdad stock market in Karrada district and traded fire with the guards, killing two of them. They then blew up a booby-trapped car and a hand grenade outside the market while trying to flee the scene which was surrounded by Iraqi security force who fired at the attackers, according to an Interior Ministry source.

The gunmen were later forced to resort to the nearby Saidat al- Najat church and continued exchanging fire with the Iraqi troops. Some witness said the attackers' accent were not local which means maybe they are not Iraqis.

Violence and sporadic high-profile attacks are still common in Iraqi cities as part of recent deterioration in security which shaped a setback to the efforts of the Iraqi government to restore normalcy in the country after violence-torn Iraq held parliamentary elections about eight months ago.