They say a suicide bomber rammed a car with explosives into the Asasey hotel in the port of Kismayo, and gunmen then stormed the building.
Regional politicians and clan elders were inside the hotel. Among those killed were popular TV journalist Hodan Naleyeh and her husband, reports say.
The Islamist group Al Shabab later said it carried out Friday's attack.
It was not immediately clear whether the attackers were still in the building.
Security official Abdi Dhuhul told AFP that a former local administration minister and a lawmaker were among the dead.
Local media outlets and a Somali journalists association said that Hodan Naleyeh - a Canadian-Somali who had reportedly recently returned to the country - and her husband Farid were among those killed in the attack.
Hodan Naleyeh had set up a popular online TV channel covering Somalia as well as life in the Somali diaspora.
NBC NEWS:
More than two dozen people were killed in an attack on a hotel in Somalia, local authorities said Saturday.
A prominent Canadian-Somali journalist and several foreigners were among 26 dead after Somali forces ended an all-night siege on the hotel in the southern port city of Kismayo, officials said.
Those killed include three Kenyans, three Tanzanians, two Americans, one Canadian and one Briton, said Ahmed Madobe, the president of Jubbaland regional state which controls Kismayo.
Fifty-six people, including two Chinese, were injured in the hotel attack, he told reporters.