The British Foreign Office says its urgently seeking more information from Bangladeshi authorities, as diplomatic staff at the British High Commission - just streets away from the restaurant - remain unaccounted for.
"We are discussing ways to rescue the people, including foreigners, who are inside the cafe," police official Mohammad Habibur Rahman said.
"Our priority is to rescue them peacefully without the loss of any life." Employee Sumon Reza, who managed to escape the restaurant, reportedly said that about eight assailants armed with pistols, swords and bombs stormed the kitchen and took the chef hostage at about 9.20pm (4.20pm BST).
Sumon said that the gunmen shouted "Allahu Akbar" (God is Greatest) before blasting several bombs, according to local press.
The group claims to still be holding a number of hostages inside the cafe.
Bangladesh security forces were preparing to try to free the hostages early on Saturday morning.
Gowher Rizvi, an adviser to Bangladesh Prime Minister Sheikh Hasina, said security forces were trying to negotiate a way out of the crisis, failing which they would launch an offensive to end the siege.
Italian and Indian nationals are among the hostages, said a duty officer at the Rapid Action Battalion's (RAB) control room.
Islamic State has posted photos it claims are of foreigners killed in an attack on a cafe in Bangladesh.
At least eight terrorist gunmen 'shouting "Allahu Akbar"' stormed the restaurant, close to the British High Commission, taking a number of people hostage .
ISIS has claimed responsibility for the attack and said 24 people of different nationalities were killed.
Police said two officers were killed and at least 20 people and 40 wounded at the Holey Artisan restaurant in the upscale Gulshan area of Dhaka.