The raid on the sprawling complex, which also houses a joint NATO-Afghan base, is seen as the most serious attack on the largest military installation in southern Afghanistan in 14 years of war.
Witnesses said the assailants had taken some families hostage, using them as "human shields" after storming the complex at sundown on Tuesday, slowing down the military's clearance operation.
"The fighting started around 6:00 pm (Tuesday) and intensified over the night," 30-year-old university student Izatullah, who lives inside the complex, told AFP.
"Soldiers were calling on Taliban attackers to let women and children go but attackers declined. We could hear children screaming during the fighting."
More than 20 hours after the siege began, the Afghan defence ministry said nine insurgents had been gunned down, one was injured and another was still holding out against the soldiers.
"Unfortunately during the battle, 37 innocent Afghans were killed and 35 others injured," the ministry added.
It did not offer any breakdown of the casualties but a Western official briefed on the matter told AFP that it included a large number of civilians.
"This is the most serious attack we've witnessed against the (Kandahar) installation," the official said.
The militants had managed to breach the first gate of the high-security complex and took up position in an old school building, engaging security forces in pitched firefights.
The Taliban posted a picture on their website of the militants it said were involved in the brazen attack. It shows 10 young men sporting trimmed beards, Kalashnikovs and identical military uniforms.
The face of one of them is obscured with blue ink for unknown reasons.
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