It was not immediately clear, though, whether the killed Iraqis were resistance fighters or innocent bystanders and a British military spokeswoman said an investigation had been ordered to ascertain the truth.
The spokeswoman said the firefight took place in the village of Oal at Sahil in southeast Iraq after a routine British patrol came under fire.
"Three Iraqis were shot dead and an investigation is now under way," a spokeswoman said.
"The soldiers came under fire from heavy machineguns and a rocket propelled grenade," she said.
"None of the injuries are life threatening but some of them might be returned to the UK for further treatment," the spokeswoman added.
The soldiers were rescued by back-up forces and admitted to a military hospital near Basra.
Southern parts of Iraq under British forces have been relatively quiet for the past few months. In June, six British military policemen were killed in an attack in Majjar al-Kabir.