Karzai is demanding that the coalition hand over the guards to Afghan authorities.
Officials say the police chief, Matiullah Qati, was among 10 officers killed in a gun battle outside the attorney general's office in Kandahar.
A U.S. military spokeswoman says the Afghan force that killed the officials was trying to free men in government custody.
Karzai's demands could be the first major test for newly arrived Gen. Stanley McChrystal, who commands all U.S. and NATO forces in the country.
Officials said the clash involved American and Afghan security forces, but it was not immediately clear who was shooting at whom and why.
The shooting started after Afghan and U.S. Special Forces moved into a heavily protected government complex in Kandahar and ordered employees to stay indoors, said Mohammad Khan, an employee in the attorney general's office.
A U.S. military spokeswoman, Lt. Cmdr. Christine Sidenstricker, said that Afghan forces were trying to free people in custody in the government complex when the shooting happened.
Sidenstricker told CBS News' Fazul Rahim, "there were no U.S. forces involved in the attack, and the Afghan side is being investigated by Afghan authorities."
Ahmad Wali Karzai, the brother of President Hamid Karzai and a top official in Kandahar, said provincial police chief Matiullah Qati was among 10 policemen killed. The provincial head of the criminal investigations department, Abdul Khaliq Hamdard, also died, Karzai said.
"We were inside sitting when a big police convoy came, and after that the fighting happened. I do not know how and why," Khan said.
The area was sealed by U.S. forces after the shooting, an Associated Press reporter at the scene said.
Kandahar is the spiritual birthplace of the Taliban, an Islamic militia that ruled Afghanistan in the 1990s and was ousted during the U.S.-led invasion in 2001.
The Taliban has made a comeback in the last three years, wreaking havoc in much of the country's south and east, including Kandahar, and forcing President Barack Obama's administration to pour thousands of troops into a war U.S. officials once said had been won.
Taliban militants have launched several sophisticated attacks in Kandahar over the last year. But gun fights between U.S. and Afghan troops have also happened several times in recent years.