Radio Sawa, a US-financed Arabic language station, said the group included six members of an Iranian delegation in Baghdad to negotiate contracts on electric power stations.
"Had the US foreign policy makers read history, they would not get involved in any war after Vietnam"
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The Iranian embassy said the six from Iran's electricity ministry and an embassy employee were staying at the Sheraton Ishtar hotel in central Baghdad, which American forces entered late on Tuesday.
The Associated Press filmed the American soldiers leading about 10 blindfolded men who had their hands cuffed.
The US military declined to comment on the raid, saying the action was part of an ongoing operation.
Tensions between the US and Iran have been running high since the US in January arrested five Iranians they say are members of Iran's elite Quds Force, which is accused of arming and training Iraqi fighters.
Tehran said the five are diplomats and has demanded their release.
Speaking to thousands of veterans at the American Legion convention, Bush said that "if these forces of radicalism and extremism were allowed to drive us out of the Middle East ... the region would be dramatically transformed in a way that could imperil the civilised world".
Pointing at military progress in Iraq, Bush said: "It will take time for the recent progress we have seen in security to translate into political progress.
"Leaders in Washington need to look for ways to help our Iraqi allies succeed, not for excuses to abandon them."
Bush hit out at critics, saying that "they disregard the political advances on the local level".
He said: "Iraqis are increasingly reaching accommodations with each other," but acknowledge that "our new strategy is showing far fewer results at the national level".
The president has routinely described Iraq as the central front in America's so-called "war on terror".
But many Democrats were unimpressed with Bush's speech on Tuesday, accusing him of confusing the issue by linking the invasion of Iraq to the September 11 attacks on the World Trade Centre in 2001.
Senator Joseph Biden, chairman of the senate Foreign Relations Committee, told reporters that Bush's logic on Iraq was flawed.
"It's been [Bush's] misguided policy and his mismanaged war that have actually fuelled extremism and extremists in Iraq, Afghanistan and beyond," Biden said.
"The president, in my view, likes to confuse the American people by conflating Iraq, al-Qaeda in Iraq, with the terrorists who attacked us on 9/11."
At a news conference in Tehran, Ahmadinejad said: "The political power of the occupiers [of Iraq] is being destroyed rapidly and very soon we will be witnessing a great power vacuum in the region."
He said that Iran "with the help of regional friends and the Iraqi nation, are ready to fill this void" and noted that Saudi Arabia was one of the countries Iran was ready to work with.
|Ahmadinejad said the US and other forces |
had run out of solutions in Iraq [AFP]
With Shia Muslims now in power in Baghdad, ties have strengthened between Iran and Iraq since 2003, when US-led forces toppled Saddam Hussein, Iraq's Sunni president.
Ahmadinejad said the region did not need countries from "thousands of kilometres away" to provide security and said that US and other forces in Iraq and Afghanistan had run out of solutions.
"They are trapped in the swamp of their own crimes," he said. "If you stay in Iraq for another 50 years, nothing will improve, it will just worsen."
In his speech in Reno, Bush accused Iran's leadership of trying to destabilise Iraq, calling Tehran a destructive influence that put American lives at risk.
"Iran is sending arms to the Taliban in Afghanistan to be used to attack American and Nato troops," Bush said.
"The most important and immediate way to counter the ambitions of al-Qaeda and Iran and other forces of instability and terror is to win the fight in Iraq."
Bush and other US officials have long accused Iran of supplying weapons to groups in Iraq.
Earlier this month, US officials said that Washington might soon name Iran's Revolutionary Guard a foreign terrorist group, a move that would enable the US to target the force's finances.
A report by General David Petraeus, the US commander on the ground in Iraq, and Ryan Crocker, the US ambassador to Iraq, is due to be submitted to congress by September 15.
With 164,000 US troops in Iraq and the patience of the American public and the Democrat-controlled congress growing thin, there is speculation the report could trigger a change in Iraq policy.