Dahir Amin Jesow, a federal politician from Beledweyne, the capital of Hiraan region, said at least four people had been killed.
Hours after the initial attack, government forces were trying to flush out the militants, some of whom had been killed in nearby alleys, Jesow said.
Islamist militant group al-Shabab claimed responsibility for the attack in a statement and said it had killed more than 10 people.
Abdullahi Fidow, a clan elder in Beledweyne, said the hotel meeting was meant to discuss ways of countering al-Shabab in the region.
"I was supposed to attend the meeting but got delayed because I was busy with a family issue. The blasts occurred before I reached the hotel," he told Reuters.
Al-Shabab frequently launches bombings and gun attacks in the fragile Horn of Africa country as it tries to topple the government and establish its own rule based on its strict interpretation of Sharia law.
"We first heard a huge blast followed by gunfire, then another blast was heard," said Ali Suleiman, a shopkeeper who witnessed the attack.
Parts of the Qahira Hotel were reduced to rubble as government troops and gunmen exchanged fire, Suleiman added.
Halima Nur, a witness who lives near the hotel, said gunfire could be heard intermittently as the siege continued.
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