U.S. officials confirmed two American soldiers died and that four Americans, including a civilian interpreter, were wounded.
Iraqi police and witnesses said the attack took place in front of the Madain municipal building where the Americans had come to confer with local authorities.
U.S. officials said the Americans were leaving the building when the assailant opened fire about 1 p.m. However, the U.S. officials released no further details except that the assailant was killed.
"The attacker came out of his car with an AK-47 rifle in his hand and started firing on the American soldiers until he was killed by the return fire," said Hussein al-Dulaimi, 37, who owns an agricultural machine shop across the street.
Al-Dulaimi, other residents and a police official said the attacker had been a Sunni member of the municipal council until he was ousted by Shiites during sectarian violence following the February 2006 bombing of a Shiite shrine north of Baghdad.
But the Interior Ministry said the gunman was still an active council member.
The motive for the attack was unclear, and ministry officials were investigating whether the gunman had ties to Sunni insurgents.
The Madain area was a center of Saddam Hussein's biological and chemical weapons program. It also includes the tomb of Salman al-Farsi, a companion of the Prophet Muhammad.
The tomb has been the source of sectarian tension in recent years, with both Sunni and Shiite religious organizations competing for control of the shrine, which used to draw pilgrims from across the Muslim world.
U.S. military officers have been working vigorously to restore and promote local administrations, with the goal of preventing the area from falling back under the control of rival Sunni and Shiite extremists.
American and Iraqi officials have been stepping up their campaign against both Sunni and Shiite militants to prevent them from regrouping following setbacks in Baghdad, Basra and other major cities.
Prime Minister Nouri al-Maliki flew Monday to the southern city of Amarah, where U.S.-backed Iraqi troops launched an offensive last week against Shiite militias, including the Mahdi Army of anti-American cleric Muqtada al-Sadr.
There has been no resistance but dozens of people have been arrested, including police officers and the mayor for alleged ties to the militias.
Al-Maliki, a Shiite, promised to keep Iraqi troops in Amarah "until we are sure that those murderers and criminals won't return."
He also singled out Diyala province as a possible next target for a military offensive, promising to "continue chasing the remnants of the defeated al-Qaida elements, former regime followers, the militias and the outlaws.
Last year, U.S. troops regained control of the Diyala provincial capital of Baqouba, which had been held by al-Qaida in Iraq and other Sunni militants.
But the extremists appear to be regrouping in Diyala, targeting a network of U.S.-backed Sunni fighters - known as awakening councils - organized by the Americans to fight al-Qaida.
A roadside bomb exploded Monday near an awakening council patrol in Buhriz, a suburb of Baqouba, killing two of the fighters, a police official said, speaking on condition of anonymity because he wasn't authorized to release the information.
Late Sunday, 10 members of another awakening council group were killed and 24 were wounded during a mortar attack in Udaim, about 70 miles north of Baghdad, according to army Maj. Mohammed Thawra.
A female suicide bomber struck an area near government offices in Baqouba on Sunday, killing at least 16 people and wounding dozens.
