The brazen assault on the Spozhmai Hotel will exacerbate fears that insecurity is spiralling as NATO combat troops prepare to exit the Afghan war in 2014.
Around 12 hours after the attack began - and after a number of the hostages were freed by security forces - interior ministry spokesman Sediq Sediqqi said the assault ended with the death of the last militant.
A series of sensational commando-style insurgent attacks have targeted Kabul, the most heavily protected part of the war-torn country, typically taking hours to quell and striking fear into the public.
The Spozhmai is a haunt of the wealthy Kabul elite and on Thursday nights - the start of the Afghan weekend - is usually packed with families and mixed groups of men and women.
The Taliban assault began around 11:30 pm (1900 GMT) Thursday, when suicide attackers armed with rockets and Kalashnikov rifles stormed the hotel, said Mohammad Zahir, the head of Kabul police criminal investigation department.
At least one of the attackers detonated an explosive suicide vest, Zahir said.
The standoff ended at 11:00 am, Hashmat Stanikzai, the chief spokesman for Kabul police told AFP, saying four civilians, three hotel guards and a police officer had been killed, along with the five attackers.
The Taliban, who are leading a bloody insurgency against Karzai's Western-backed government, claimed responsibility.
Spokesman Zabihullah Mujahid told AFP that foreign diplomats, and members of the US-led NATO mission and the Kabul government gathered at the hotel "every Thursday for wild parties, drinking and prostitution".
Qargha lies around 10 kilometres (six miles) from central Kabul and its pleasant weather and greenery make it a popular picnic spot for daytrippers from the capital. The lake is surrounded by hotels, restaurants and wedding halls.
Sediqqi said at least 40 civilian hostages taken by the militants were freed before the end of the standoff.
A spokesman for NATO's International Security Assistance Force (ISAF) confirmed that its troops and Afghan security forces had responded to the assault.
NATO intends to withdraw its 130,000 combat troops from Afghanistan by the end of 2014, exiting the costly, decade-long war that has killed tens of thousands of Afghan civilians and more than 3,050 foreign soldiers.
President Hamid Karzai warned Thursday that attacks on Afghan police and soldiers were increasing, saying that 20 to 25 personnel were being killed every day.
He admitted his government and its Western allies had failed to bring peace to Afghanistan, which has suffered almost continuous conflict for the past three decades, saying "our land has not been secured, our homes, our people are not safe".
On Wednesday, a suicide bomber attacked a joint Afghan-NATO patrol in the eastern city of Khost, close to the Pakistan border, killing 21 people including three US soldiers.
On June 6, a rare double suicide attack killed 23 people in Kandahar, targeting vehicles that supply the largest NATO base in the south.
Hotels, guest houses, government buildings, embassies and military bases in Kabul have been a frequent target of commando-style insurgent attacks.
In April, militants launched coordinated attacks on government offices, embassies and foreign bases in Kabul in the biggest assault on the Afghan capital in 10 years of war.
On June 28, 2011, 21 people were killed when suicide bombers stormed the luxury Intercontinental Hotel on a pine-dotted hillside overlooking Kabul.