Five children have been killed after a shootout between Taliban insurgents and Australian soldiers in Afghanistan, the Australian Defence Force said on Friday.

The incident happened on Thursday in Uruzgan province, where Australia's special forces were clearing a number of houses in the hunt for insurgents, defence officials said in a statement on Friday.

"Current reporting indicates that those killed include a suspected insurgent and, sadly, local nationals including five children killed, and two children and two adults injured," defence said.

Those injured in the incident were treated at the scene and evacuated for further treatment.

Australia's military has started an inquiry into the incident, but said the rules of engagement for forces in Afghanistan were designed to minimise civilian casualties.

Australia has around 1,100 troops in Afghanistan, based mainly in the southern Uruzgan province where the Taliban has a strong presence.