Baquba's main hospital said it received one body and nine wounded from the clashes near Buhruz, 10 kilometres south of Baquba.
Buhruz's alderman Awaf Abdul Rahman said one of the wounded later died of his injuries, but there was no immediate confirmation from the hospital.
The US military said insurgents opened fire on Iraqi security forces at around 11:00 am as they were providing security for the US Army's 1st Infantry Division during a raid in a farming area south of Buhruz.
"Iraqi security forces pursued the anti-Iraqi forces into town while being attacked by sporadic small arms fire and rocket-propelled grenades," said Major Neal O'Brien.
He said US forces provided air and ground support to Iraqi forces as they battled the insurgents, who "fired mortars indiscriminately into the town."
"Other than providing observation support with helicopters and firing back at the source of the mortar attack, the battle was mainly carried out by Iraqi forces," said O'Brien, noting a US military agreement with town authorities not to enter Buhruz unless asked.
Residents said missiles rained down near their homes. "We were home when missiles started exploding near our place," said Hamid Majid, 48, whose son was hurt in the attack.
The bloodshed came hours after the US military arrested 15 people and seized a weapons cache in an early morning raid near Mandalay, east of Baquba close to the Iranian border.
The raid targeted a suspected hideout of the Tahid wal Jihad hostage-taking group, controlled by alleged al-Qaeda operative Abu Mussab al-Zarqawi, the military said.
Meanwhile, a US soldier was killed when a roadside bomb struck his convoy near the northern Iraqi oil refinery town of Beiji, the US military said.
The soldier with the 1st Infantry Division died of his injuries and another was wounded after their convoy was attacked on Saturday near Beiji, some 200 kilometres from Baghdad, the military said in a statement.
It said a suspect was arrested in connection with the attack.