U.S. military officials said the civilian deaths were not intentional and the consequence of an attack on suspected Sunni insurgents, The New York Times said.

Iraqi officials said, however, the deaths likely would reinforce anti-American sentiments.

In a statement, the U.S. military said it has initiated an investigation. The targets were known terrorists, the military said, accusing the suspects of using civilians as shields, "thereby endangering others around them."

The statement said the suspects were operating a weapons storage facility and believed to be working with a suicide bombing network, as well as a senior al-Qaida "facilitator" helping foreign fighters in Iraq.

"Unfortunately, two children were killed when the other occupants of the vehicle in which they were riding exhibited hostile intent," U.S officials said in the statement released in Baghdad.

Col. Mudhir al-Qaysi of Baiji police said the incident would reinforce a negative image of U.S. troops locally.

"The scene of the bodies is ugly and these acts are unacceptable," he said.