A US military statement released early on Sunday from the coalition's Bagram Air Base headquarters north of the capital Kabul says: "Following the attack, coalition ground forces searching the area found the bodies of both the intended target and those of nine children nearby."
Military aircraft opened fire on the suspect at about 10:30 am (0600 GMT) on Saturday south of the town of Ghazni, 130 kilometres (80 miles) southwest of Kabul.
"Coalition forces acted after developing extensive intelligence over an extended period of time that determined the known terrorist was at the isolated rural site," the military said.
The suspect was believed to be responsible for recently killing two contractors working on the Kabul-Kandahar-Herat ring road, the military said.
The coalition said a commission was being set up to investigate the deaths and said its forces "follow stringent rules of engagement to specifically avoid this type of incident while continuing to target terrorists" in Afghanistan.
"Coalition forces regret the loss of any innocent life," it said.
US-led troops were remaining in the area and "over the next several days will make every effort to assist the families of the innocent casualties and determine the cause of the civilian deaths."