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Eight American soldiers and two Afghan troops have been killed in the deadliest attack on coalition troops for more than a year, officials say.
The battle happened in Nuristan province in the remote east of the country when military outposts were attacked, a Nato statement said.
The Taliban said it carried out the attack, and had captured local police.
Violence has escalated in eastern Afghanistan as insurgents have relocated from the south.
In a statement, Nato's International Security Assistance Force (Isaf) said that tribal militia launched attacks on foreign and Afghan military outposts from a mosque and a nearby village.
My heart goes out to the families of those we have lost and to their fellow soldiers who remained to finish the fight... Both the US and Afghan soldiers fought bravely together
Col Randy George
US area commander
The attack is thought to have taken place in the Kamdesh district of Nuristan, and lasted several hours.
"Coalition forces effectively repelled the attack and inflicted heavy enemy casualties while eight Isaf and two ANSF [Afghan National Security Forces] members were killed," the statement said.
The US area commander, Col Randy George, said his heart went out to the bereaved families, adding that US and Afghan soldiers had "fought bravely together".
It was the worst loss coalition troops have suffered since August 2008, when 10 French troops were killed in an ambush in Kabul province.
A Taliban spokesman, Zabihullah Mujahid, said the movement was behind the attack.
According to AP news agency, Mr Mujahid also said some 35 Afghan police officers had been taken into Taliban custody, and their fate would be decided by a council.
A local deputy police chief is reported to have said contact had been lost with 19 police officers, though the provincial governor is quoted as denying any such development.
Dangerous province
It is not the first time coalition forces have suffered damaging attacks in this region, says the BBC's Martin Patience in Kabul.
Nine US soldiers were killed in a single incident last year when more than 100 fighters breached a US outpost in the village of Wanat on the border of Nuristan and Kunar provinces.
The incident, which is still being investigated, was the biggest American loss of life in battle in Afghanistan since operations began in 2001, and forced US and Afghan soldiers to abandon the village.
The province's mountainous terrain makes it easier for insurgents to sneak up and launch attacks, but more difficult for military forces to access the area, our correspondent says.
Nuristan has been for decades been a crossing point for fighters entering the country from Pakistan, he adds.
US anxiety
The security situation in northern and eastern Afghanistan has deteriorated since the beginning of the year.
Afghans hold a banner during a protest outside the main office of United Nations Assistance Mission in Afghanistan (Unama) in Kabul on 1 October
An insecure security situation has been exacerbated by political uncertainty
The instability has been exacerbated by political uncertainty created by August's presidential poll, which has been marred by widespread fraud allegations.
The commander of the more than 100,000 Nato and US forces in the country, US Gen Stanley McChrystal, has described the situation as "serious" and is believed to have requested up to 40,000 additional troops.
But US President Barack Obama - who has already sent thousands of extra troops to the country - says strategy in Afghanistan must be agreed before a decision can be made on whether to bolster military forces further.
Source: BBC
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