"Coalition forces killed seven terrorists, wounded three, and detained an additional two terrorists during a raid in the vicinity of Baquba June 12," the military said in a statement.
"The targeted terrorists have been linked to previous coalition operations and had ties to senior al-Qaeda leaders across Iraq. Intelligence also indicates this particular terrorist cell is involved in the facilitation of foreign fighters in the area."
Women and children
The military said coalition forces received machine gun fire from a rooftop upon arriving.
"Two other individuals with AK-47s had been seen fleeing that area just prior to the assault. Coalition aircraft supporting the ground force immediately suppressed the enemy fire, killing seven."
"Following the assault, coalition troops discovered two children had been killed"
US military statement
It said there were women and children at the scene.
"Following the assault, coalition troops discovered two children had been killed. One child was wounded and evacuated for treatment," the military said.
It added that troops secured one rocket propelled grenade launcher, five rockets, nine AK-47 assault rifles and 20 loaded ammunition magazines.
On Wednesday, al-Qaeda in Iraq leader Abu Musab al-Zarqawi was killed near Baquba in an air strike.
Witnesses said the raid on Monday left a total of nine killed.
A bus bombing on Monday killed
six workers in Baghdad
Muhammad Abbas, a relative of those killed, said the raid was started after an error on part of the local guard in the village of al-Hashmiya, west of Baquba, where the air strike was carried out.
"We were sleeping on the rooftop at midnight when one of the local guards fired in the air as he saw individuals who he thought were insurgents ... unfortunately they turned out to be US troops on foot patrol," he said.
"The US forces responded fiercely and struck several houses first and later concentrated on one house. We later discovered that nine members of the house, including seven children and youngsters were killed while four members are missing."
Another witness, Shahin Abdullah, at the local hospital where the bodies were brought, described the US attack as fierce.
"We heard sound of explosions and airplanes in the sky. The result was that nine were killed and four are missing," Abdullah said.
He added that the local guard mistook the US troops for armed groups as "we are not used to the troops doing foot patrol. They usually come in tanks and vehicles."
Also on Monday, a member of the Iraqi parliament said he visited an interior ministry prison in Baquba and found inmates, including women and children, had been tortured.
Iraqi legislator Mohamed al-Daini
visited a prison in Baquba
"Detainees have been tortured and abused inside to get declaration of guilt by force and to confess crimes they have not committed," said the legislator, Mohamed al-Daini.
"Among the prisoners were women and children."
In other developments on Monday, a roadside bomb killed at least 10 people and wounded another 25 in a market in western Baghdad, police said.
The blast took place in Mansour district, police said.
Earlier, a car bomb ripped through a market in Baghdad's eastern Sadr City district, killing five people and wounding 19 others.
A car bomb in a Baghdad market
killed five people
An early morning blast killed six people when it struck a minivan carrying oil refinery workers in Baghdad.
Also, a roadside bomb was detonated next to a police patrol east of Kirkuk, but missed and struck a civilian car.
One person was killed and two were wounded in the explosion.
The US military also announced on Monday that a soldier was killed by a roadside bomb while on patrol near the southern Iraqi city of Diwaniyah.
The soldier was killed on Friday night while conducting a "combat logistics patrol", the statement said.