The acting head of Laghman province, Gulzar Sangarwal said Tuesday 13 civilians killed in the pre-dawn raid took place in Armul village led by NATO and Afghan troops.
A Reuters journalist reported in Armul that a woman and 12men, including two teenagers were covered in shrouds.
President Hamid Karzai ordered the country's Interior Ministry to launch an investigation into the raid, the presidential palace said Tuesday in a statement.
Some 5,000 villagers marched to protest against the attack chanting slogans against foreign troops in Afghanistan, when troops opened fire.
Civilian casualties caused by Western forces have stoked anger towards foreign troops, which NATO commander US General Stanley McChrystal says undermines his mission.
The NATO-led force issued a statement denying it had killed any civilians in the incident, saying its forces had killed seven militants and arrested four.
We are aware of civilian casualty allegations, however there are no operational reports to substantiate those claims of harming civilians, including women and children during this operation, said a NATO spokeswoman Navy Captain Jane Campbell.
Civilian casualties during NATO military operations have sparked outrage in Afghanistan in the past.
Karzai said the civilian deaths have sapped the Afghan public's support for their government and the presence of the international forces.