Kenya's National Police Service said armed militants shot at campus guards to gain entry, triggering a "fierce shootout". The attackers still managed to get inside one of the student dormitories and some remain trapped inside.
A spokesman for al-Shabaab said the group is inside the campus and has released Muslim students.
"We've killed many people; Kenyans will be shocked when the go inside," he was quoted by the BBC as saying.
One student said he could hear militants opening doors and asking those hiding inside if they were Muslim or Christian. "If you were a Christian you were shot on the spot," he said. "With each blast of the gun I thought I was going to die."
The number of hostages being held by the group is not known. Police and military forces say they are now trying to “flush out” gunmen from the campus. The Kenyan Natural Disaster Operation Centre said 65 had been injured.
It said one suspected terrorist was arrested as he tried to flee the scene.
"They include two of our officers who were also killed," he told Reuters. "We are finding it difficult to access the compound because some of the attackers are on top of a building and are firing at us whenever we try to gain entry."
One student who fled described chaotic scenes as gunmen burst into the building. "They are just shooting randomly," he said.
"My life was in danger, in fact everybody's. They were shooting at us with live bullets, everywhere, all over the school compound.
"I am trying to call [students still trapped inside] but I can't reach anyone."
Two of the fatalities were guards at the university gates.
The US Embassy in Nairobi condemned the shooting as a "terrorist attack" on its official Twitter feed.
One Red Cross official told the BBC the attack began at 5am local time when a grenade was launched at the university’s gates.
“The attackers went into the girl’s hostel which is when they took the hostel over," she said. "Forces responded and took over the operation and they have locked down the campus.
“According to local county government officials on the ground, we have 30 casualties, who have been taken to hospital. Four of them are very serious and most of the casualties have gunshot injuries.”
A policewoman at the scene said up to 49 people had been wounded in the attack, all with bullet and shrapnel wounds.
Al-Shabaab has been responsible for a string of violent attacks in Kenya over recent years, which it claims are retribution for Kenya sending troops into Somalia.

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