Four cars carrying the Iranians, as well as seven Iraqis, were stopped at a checkpoint Tuesday evening and then allowed to proceed to the nearby Sheraton Ishtar hotel, where they were later taken into custody and questioned, the military said.
Troops seized three weapons from the cars - an AK-47 assault rifle and two 9mm pistols that had been in the possession of the Iraqis in the group. The Iraqis were serving as a protective detail but had no weapons permits, the U.S. military said.
At the hotel later, U.S. troops confiscated a laptop, cell phones and a briefcase full of Iranian and American money in the hotel, the military said.
"Following the brief room search the group was taken to a coalition facility for questioning," the U.S. military said in a statement. "The Iranian nationals had passports. It was later determined that two of the Iranian individuals were carrying diplomatic credentials."
All the Iranians were released Wednesday to Iraqi officials, the military said. The fate of the Iraqis - who identified themselves with Iraqi Ministry of Electricity badges - was not immediately clear, and the military did not say whether the confiscated items were returned.
An Iranian diplomat, who refused to give his name, told The Associated Press that one of those released contacted the embassy Wednesday morning to say that they had been handed over to Iraqi authorities.
"At 7 a.m. today, a member of the delegation called the embassy and said they are now at the prime minister's office," the diplomat said. "The Americans released them. They held them until seven this morning."
The Iranian embassy said the Iranians included two embassy staffers and six members of a delegation from Iran's Energy Ministry. The diplomat had earlier said there were seven Iranians held and one diplomat.
The embassy said the men had not yet been in to explain in full what happened, and that it was not sure whether their belongings had been returned.
The incident came as tensions between Washington and Tehran were already strained by the detention of each other's citizens as well as U.S. accusations of Iranian involvement in Iraq's violence and alleged Iranian efforts to develop nuclear bombs.
Iran has constantly complained about the U.S. detention since Jan. 11 of five Iranians who were in the northern Iraqi city of Irbil. U.S. officials say the five include the operations chief and other members of Iran's elite Quds Force, which is accused of arming and training Iraqi militants.
The Iranian regime denies any involvement in the violence wracking its neighbor.
On Tuesday, U.S. President George W. Bush lashed out at Iran for meddling in Iraq's affairs and fomenting instability in its neighbor. Bush made his remarks in a speech to the American Legion convention in Reno, Nevada, in which he presented a ringing defense of the unpopular Iraq war effort.
"I have authorized our military commanders in Iraq to confront Tehran's murderous activities," said Bush, whose administration has accused Iran of arming Shiite militias in Iraq. "The Iranian regime must halt these actions."
U.S. authorities are unhappy about Iran's arrest of four people with dual American-Iranian citizenship for allegedly seeking to undermine the Islamic republic's security. Two are imprisoned in Iran, while two are free but barred from leaving the country.
Relations also are edgy over the suspicions of the U.S. and its allies that Tehran is using its civilian nuclear power program as a screen to develop atomic weapons. Iran denies that, saying the program only has the peaceful aim of generating electricity.
The strains have many people in the region worried about the possibility of fighting between the U.S. and Iran.
But while making his latest defense of Iran's nuclear program earlier Tuesday, Iranian President Mahmoud Ahmadinejad dismissed the possibility of any U.S. military action against Iran, saying Washington has no plan and is not in a position to take such action.
Ahmadinejad declared that U.S. political influence in Iraq is "collapsing rapidly" and that Tehran is ready to help fill any power vacuum.