A rabbi and his wife were among five hostages found dead inside the remains of the Mumbai Jewish centre held by Islamist militants.
A final assault by Indian commandos on Nariman House today culminated with soldiers blowing a hole in the outer wall. Two militants were reported killed in the siege.
As many as 150 people are feared dead across Mumbai after three days of violence; up to 22 of them may be foreigners.
The Taj Mahal hotel is now the only remaining holdout of the Islamist fighters who are thought to be using hostages as human shields. According to Indian TV reports, up to six terrorists remain inside the luxury hotel.
The bodies of Rabbi Gavriel Noach Holtzberg and his wife, Rivka were found after Indian commandos seized Nariman House from the militants today.
Their deaths were confirmed by Rabbi Zalman Schmotkin, a spokesman for Chabad Lubavitch, the ultra-Orthodox Jewish group that ran the centre.
The couple's two-year-old son, Moshe Holtzberg, managed to escape with the centre's cook, Sandra Samuel, yesterday morning. The toddler is now with his grandparents.
Fighting is still ongoing at the Taj Mahal hotel. Explosions have been heard from inside the building and there have been reports of more gunfire.
The hostages are being held on an upper floor where power has been cut. At least one gunman was believed to be inside the ballroom, said a security official, ML Kumawat.
The Indian army said two militants were killed at the Oberoi hotel — now in the control of the Indian commandos — and a total of nine shot dead in the city. As many as 25 terrorists may have taken part in the assault. Around 200 guests were released following the police operation.
The overall death toll is expected to rise further. Neville Bharucha, from the Parsi ambulance service, said bodies inside the Taj Mahal hotel could not be recovered because terrorists were still at large.
"There are dead bodies in the old Taj building," he said, as he stood outside the hotel. "They are all lying there, they are the guests. We can't recover the bodies because of the terrorists. They are still holding human shields."
Two schoolgirls died when fresh fighting broke out near the offices of the city's police commissioner, according to hospital sources.
The mayhem has left the skyline of India's financial capital smoking. Mumbai, a metropolis of 19 million people, has been reduced to a ghost town — with many international firms cancelling travel and closing offices.
World leaders were quick to condemn the attacks. The US president-elect, Barack Obama, vowed that America would work with "India and nations around the world to root out and destroy terrorist networks".
Recently improved relations between Pakistan and India were under strain after the Indian prime minister, Manmohan Singh, pointed the finger of blame at "external forces". He said Delhi would "take up strongly" the use of neighbours' territory to launch attacks on India.
India's external affairs minister, Pranab Mukherjee, was more pointed. "According to preliminary information, some elements in Pakistan are responsible for Mumbai terror attacks. Proof cannot be disclosed at this time," he said.
One captured militant was reported to be a Pakistani national. The accusations raised fears that the peace process between the two nuclear rivals would stall.
The Indian navy intercepted two Pakistani merchant vessels off the coast of Gujarat. It is believed that some of the militants arrived in Mumbai on Wednesday night by boat. The navy was last night searching for the ship that dropped them off.
Pakistan's president, Asif Ali Zardari, condemned the attack as "detestable". He is to send the head of the country's Inter-Services Intelligence to India to share information on the attacks, following a request by Singh.
Two Scotland Yard officers were on their way to Mumbai to help the authorities. The Foreign Office said it was investigating claims that some of the attackers were British-born Pakistanis.
It was clear that foreign targets, especially those linked to the US and UK, had been singled out. One of the first targets was the Leopold cafe, a hangout for foreign tourists.
The attackers picked off British and US citizens in the luxury hotels. Television pictures showed men shooting at random as they drove through streets in a stolen police jeep.
Many hotel guests barricaded themselves into their rooms and hoped for the best. Yasmin Wong, a CNN employee who was staying in the Taj Mahal, told the news network that she hid under her bed for several hours after she was awoken by gunfire.
She said she received a phone call from the hotel telling her to turn her light off, put a wet towel by the door and stay in her room until she was told otherwise.
The Foreign Office confirmed that one Briton, 73-year-old Andreas Liveras, was killed. The yachting tycoon was shot dead apparently moments after speaking to the BBC by phone from a basement.
Other foreigners killed included two Australians, a Japanese woman, an Italian, three Germans and four US citizens, including Holtzberg, the rabbi, and his wife.
The other American victims were Alan Scherr, 58, and his 13-year-old daughter. Svherr was from the US-based Synchronicity Foundation, which promotes meditation.
The majority of those killed were ordinary Indians boarding trains or dining out. At least 315 people were injured.