"First some military vehicles arrived, then the federal police arrived, also the local police, all of them masked, also the ministerial police arrived to that hotel," a witness told Associated Press television news.
"Yes there was a lot of movement, and it was probably what the situation required, some of the criminals got away. But I think the more dead the better."
Two men and a woman were caught in the gunfire and wounded, paramedics said.
Four Guerrero state police officers were found handcuffed inside the garage of the house after the operation, an army colonel, who did not give his name, told reporters at the scene.
"We found them like this, handcuffed, and they say they were kidnapped. So if they were kidnapped, as they say, then we rescued them," he said.
Troops seized 36 rifles, 13 shotguns, two hand grenades, 13 fragmentation hand grenades, 3,525 cartridges, 180 magazines and eight vehicles, according to the directorate.
Felipe Calderon, Mexico's president, has vowed to tackle drug violence, which has killed about 2,300 people so far this year, by deploying 45,000 troops and federal police across the country.
Al Jazeera's Mariana Sanchez, reporting from Mexico City, said that it was difficult to say whether the crackdown on the cartels was working.
"There has been drug violence in Mexico for decades," she said.
"But since President Felipe Calderon took power, he has decided to attack the cartels head-on and as a result they have been hard hit with drug lords and hit men detained around the country.
"This brings a shuffling in the structure and the command of the cartels, so the level of violence is higher as the cartels fight among themselves."