Fire fighters said they had found four charred bodies in the wreckage.
The helicopter burst into flames on impact and a thick cloud of black smoke billowed into the air. Police said it crashed into a building near the provincial governor's office, but there were no Iraqi civilian casualties on the ground.
"A multinational forces helicopter was hit by a rocket and went down on houses in central Basra," Lieut. Colonel Kareem al-Zaidi, Basra police spokesman, said. He added there were no casualties on the ground.
In London, Des Browne, Britain’s new defence minister, confirmed the casualty reports and said that "a number" of British soldiers were killed in a helicopter crash on Saturday in the southern city of Basra.
Britain has around 8,000 soldiers
deployed around Basra
Browne said that the situation at the crash site was still developing but that "at this early stage I can confirm the tragic deaths of a number of British service personnel."
"The cause of the crash remains unclear. Together with the Iraqi emergency services, British forces are securing the crash site, which will help to ensure a thorough investigation of all possible causes of the incident," he said in a statement.
Earlier an AFP correspondent reported seeing the corpses of two British servicemen in the burning wreckage of the helicopter, which one policeman in Basra had told AFP was downed by a rocket fired from Basra.
Browne, who was named defence minister on Friday following a major cabinet reshuffle, said it was too early to determine the exact cause of the crash.
"I would urge people not to speculate on what may have happened until the situation in Basra is calmer and we are able to establish the facts," he said.
Britain has some 8,000 soldiers deployed in and around Basra. Not including the death toll from Saturday, it has lost 104 soldiers, 79 of them in combat operations, since joining the US-led invasion of Iraq in March 2003.
In January last year, 10 British aircrew died when their Hercules transport plane lost its wing and crashed just north of Baghdad after small arms ground fire had set a fuel tank ablaze.
Mob attacks troops
Soon after the crash, hundreds of angry youths surrounded the area and started attacking the British troops, cordoning off the crash site, with rocks and missiles.
Soon, a gun fire broke out between armed civilians and British troops. Two military tanks and a Land Rover were set on fire by the mob; one soldier was wounded by shrapnel and an AFP photographer at the site was hit in the leg by a rubber-coated bullet.
"There were clashes between our guys and the people there and one of our tanks did take a petrol bomb thrown at it, but I have no other details"
A British military spokesman
A British military spokesman confirmed the clashes.
"There were clashes between our guys and the people there and one of our tanks did take a petrol bomb thrown at it, but I have no other details," he said.
Dozens of British military vehicles had arrived at the site, while helicopters and two aircraft were hovering in the sky above the crash site, the correspondent reported.
He said the crowd could be seen throwing bottles full of petrol at the burning tanks and the Land Rover.
The crowd was chanting: "Victory for the Mehdi Army!"
The Mehdi army is the militia loyal to firebrand Shi'ite Muslim cleric Moqtada al-Sadr, who has demanded an end to the US-led occupation of Iraq and is a key figure in the Islamist Shi'ite Alliance bloc that will lead a new national government.