Brazilian police have rescued 35 people after they were taken hostage for about two hours by a group of heavily armed men in Rio de Janeiro's luxury Intercontinental hotel.

The armed men had first become embroiled in an exchange of fire with police outside a large slum near the upscale Sao Conrado neighbourhood on Saturday, before escaping to the hotel, Colonel Lima Castro, a police spokeswoman, said.

"Our information is that a woman died, we don't know the circumstances," Castro said, referring to the initial shoot-out.

Two police officers and three members of the armed groups were wounded, she said.

The police said they swept the entire hotel, arresting 10 suspects. Helicopters hovered above the scene, searching for additional suspects.

Witnesses said that other members of the armed group had fled the hotel aboard three pick-up lorries and five motorcycles, heading towards the Rocinha shanty town.

"I have never seen so many criminals together. All of them were wearing the same outfit, like uniforms, and were on the streets shooting into the open air," a witness told the Reuters news agency. "It was a war zone."

World Cup concerns

Television images had shown an elite unit of Brazil's military police entering the hotel and evacuating approximately 400 guests from its premises.

Last year, the Intercontinental hotel hosted the World Economic Forum on Latin America.

Security in Rio de Janeiro is of great concern as the city prepares to host the final of the 2014 football World Cup and the 2016 Olympic Games.

Officials have vowed to fight violence, and in the past year started an aggressive programme of raiding slums where heavily armed drug gangs hold sway, driving them out and creating police outposts in the poor communities.

The programme has managed to clear drug gangs from about 10 slums located in Rio's rich southern zone.

The Intercontinental is a favourite among foreign tourists, but the nationalities of those taken hostage were not immediately known.