The family members, including three children, were killed outside a military base near Baquba, as they returned from a funeral.
"The soldiers started shooting at us from all over," said Ahmed Kamel al-Sawamra, a 22-year-old student who was driving the car and who escaped injury.
"I slowed down and pulled off the road, but they continued firing," he said.
Two men and three children, aged one, two and three, were killed and two women and a child were wounded in the shooting incident, which occurred when the car approached a roadblock, Iraqi police said.
US forces said only three died.
US military spokesman Major Steven Warren said they were checking that the necessary rules of engagement were followed.
But ultimately top insurgent Abu Musab al-Zarqawi was responsible for the deaths.
"Zarqawi is the reason they got shot, if it wasn't for VBED's plowing into convoys, no one would be shooting at cars," he said, using the military's acronym for car bombs.
Insurgents have repeatedly rammed US convoys with car bombs, making US forces very wary of approaching cars.
Zarqawi may be dead
Iraq is checking reports that suspected leader of Al Qaeda in the country, Abu Musab al Zarqawi is dead.
It’s believed Jordanian militant al-Zarqawi may have been killed during fighting in northern Iraq.
Eight people killed in the gunfight and subsequent explosions.
Foreign Minister Hoshiyar Zebari said senior militants were present in a house in Mosul when US and Iraqi forces stormed it, causing some of those inside to blow themselves up.
"In my view, I would say there must have been some key leaders of the insurgency, especially the fundamentalists - al-Qaeda type
of people - so I would not be surprised if he could be one of those
who blew himself up,” he said.
Doubt
It has not yet be determined if al- Zarqawi was among those killed.
And US Ambassador Zalmay Khalilzad, speaking to reporters in Iraq, said he did not believe the militant was dead.
"I do not believe that we got them," Khalilzad said.
"Of course the days are numbered, we are after him, we are getting closer to that goal but unfortunately we did not get him in Mosul."
Mr Zebari said only DNA tests could confirm if al Zarqawi was among those killed.
"Unless they get a confirmation from the DNA it will be difficult to say whether it was him or some of his lieutenants," Mr Zebari said.
Checks are being made.
Al Zarqawi's group has carried out many of the deadliest bombings in Iraq and also claimed responsibility for the hotel bombings in Amman, Jordan, earlier this month.
He is known to have been active in Mosul in the past.
The US military is offering a $25 million bounty for information leading to his capture or arrest.
Timetable for troop withdrawal
Leaders of Iraq's political factions have called for a timetable for the withdrawal of foreign forces, in talks in Cairo.
A statement supported by Christian, Shi’ite, Sunni and Kurdish leaders demanded the timetable, as well as the release of prisoners and a programme for rebuilding Iraq's armed forces.
The statement also criticised terrorism.
"While resistance is a legitimate right for all peoples, terrorism is not a legitimate form of resistance and we therefore condemn terrorism and violent acts targeting civilians, humanitarian organisations and places of worship," it said.
Although there were tense moments, the meeting, sponsored by the Arab League, ultimately resulted in an agreement to hold a reconciliation conference at the end of February.
Arab League Secretary General Amr Mussa, was pleased with the outcome of the meetings.
"I consider it a real success, I would say that we have succeeded in bringing opinions closer by about 70 percent, but I will continue to warn against exaggerated expectations," he said.
He added, "It's a first step, many difficulties and differences remain."
US troop reductions
US Ambassador to Iraq Zalmay Khalilzad said next year would probably see some US troop reductions.
It is "possible to begin adjusting our forces downwards, meaning begin to withdraw, some forces beginning next year," he told CNN television.
Cheney blasts Iraq war critics
But US Vice President Dick Cheney launched a blistering new attack on critics of the Iraq war, saying withdrawing troops would cause a "dangerous illusion."
He also said people now accusing President George W Bush of misleading Americans into the war were guilty of “revisionism of the most corrupt and shameless variety."
But the pressure is on the administration.
A recent Newsweek poll said 52 per cent of Americans believed Mr Cheney deliberately misused intelligence to build a case for the Iraq war.
And last week, respected Democratic lawmaker, John Murtha, called for the 160,000 US troops in Iraq to be brought out.
Following Bush's lead, Cheney toned down White House attacks on Mr Murtha, a decorated Vietnam War veteran.
But Mr Cheney said, "It is a dangerous illusion to suppose that another retreat by the civilized world would satisfy the appetite of the terrorists and get them to leave us alone."
He also said it was fair to debate the decision to go to war and acknowledged that US intelligence about Iraq's weapons of mass destruction was wrong.
But he insisted the intelligence was the best available.
"The flaws in the intelligence are plain enough in hindsight. But any suggestion that pre-war information was distorted, hyped or fabricated by the leader of the nation is utterly false," he said.
"What is not legitimate, and what I will again say is dishonest and reprehensible, is the suggestion by some US senators that the president of the United States or any member of his administration purposely misled the American people on pre-war intelligence."
He added, "Some of the most irresponsible comments have come from politicians who actually voted in favour of authorizing the use of force against Saddam Hussein."
Outspoken critic
Mr Cheney has been the most outspoken White House critic of those now attacking the administration over the Iraq war.
"… a few politicians are suggesting these brave Americans were sent into battle for a deliberate falsehood,” he said.
"This is revisionism of the most corrupt and shameless variety. It has no place anywhere in American politics, much less in the United States Senate."
Public doubts about the war have sent personal ratings for US President Bush and Vice President Cheney to an all time low.
Democrats attack
And the Democrats have not relented in their attacks on the White House.
Senator Joseph Biden, the senior Democrat on the Foreign Relations Committee, said the administration "is bringing us to the verge of a national security debacle."
Harry Reid, the Democratic leader in the Senate, called on Mr Cheney to "come clean" with Americans and repeated accusations that "the administration misused intelligence in its rush to war."
Iraq has become the main item on the US political agenda.
Almost 2,100 US troops have been killed in the country.
And the first ever calls to withdraw the troops by a member of Congress, Mr Murtha, have exposed the divisions of war.
He seems to be supported by the public, according to opinion polls; a majority of people also supports bringing troops home.
But US Defence Secretary Donald Rumsfeld insists any troop pullout would be decided by military commanders in Iraq based on security conditions.