U.S. forces killed two suspected militants as well as two women and a child in a raid in the Iraqi city of Baquba on Friday, the military said.
Police officers and neighbors said six members of one family were killed when U.S. helicopters rocketed their house.
"The raid was targeting terrorists associated with senior al Qaeda in Iraq network members who have been targeted in previous Coalition operations and have been linked to several attacks against Iraqi citizens," said a military statement.
"Intelligence also indicates that the targeted terrorists have extensive links to foreign fighters in the area."
The raid came at a sensitive time when U.S. Marines are under criminal investigation over allegations they shot dead 24 civilians in the Iraqi town of Haditha last year after one of their comrades was killed by a roadside bomb.
"The U.S. forces bombed civilian houses in Baquba, killing and wounding civilians," Raad al-Dahlaki, the head of the Baquba provincial council, told Reuters.
Police and neighbors said people in one of several houses that were attacked by U.S. forces and helicopters had mistaken the Americans for hostile Shi'ite militiamen because they were wearing black. As a result they fired on the U.S. troops.
"They saw men who they thought were militiamen coming to harm them and they fired at them and then the Americans responded with shooting and helicopter attacks," Fawzi Ahmed, a relative of the Abdul Hassan family.
The U.S. military said troops came under small arms fire.
Victims included Ghadban, the 70-year-old head of the family, and his three-year-old granddaughter Ghufran, according to police and hospital sources.
As she lay in the morgue with part of her head blown off, a relative stood over her small frame and wept.
Twenty three people were injured in the overnight assault in Baquba, including several women and children, said the military.
"After the target block was contained, several men were seen moving around on the roof tops. The ground force twice gave verbal instructions for all occupants to exit the target buildings. These instructions were ignored."
"The troops secured the area using a combination of aerial and ground fire."
(Writing by Michael Georgy, editing by Ralph Boulton)