The governor of Helmand province said the two men, two women and three children died when the car they were travelling in was hit by NATO fire late Friday.
Earlier, NATO said its International Security Assistance Force (ISAF) called in an airstrike on two vehicles believed to be carrying a Taliban leader and his associates, but later discovered they were transporting civilians.
ISAF forces fired on a vehicle carrying insurgents, said a statement from Helmand governor Muhammad Gulab Mangals office. The explosion hit another vehicle in which civilians were travelling, and as a result two men, two women and three children were killed and a man, a woman and three other children were wounded.
NATO said it had launched an investigation into the incident, which came after nine people - who Afghan officials said were children collecting firewood - were killed in a NATO airstrike in eastern Kunar province this month. Civilian casualties in military operations are highly sensitive in Afghanistan as coalition troops battle to curb a Taliban-led insurgency ahead of a planned handover of security to Afghan forces.
The Kunar strike unleashed public fury, leading the US troop commander in Afghanistan, General David Petraeus, to issue a rare public apology.
Western-backed Afghan President Hamid Karzai, who has shaky relations with Washington, condemned those deaths and said Petraeus apology was 'not enough.
The civilian casualties are a main cause of worsening the relationship between Afghanistan and the US, a statement from the Afghan presidency at the time quoted Karzai as saying. The people are tired of these things and apologies and condemnations are not healing any pain.
Karzai argues that civilian deaths in NATO operations turn people against his pro-US administration and help the Taliban to recruit more fighters.
The United Nations says Afghan civilian deaths in the war increased 15 percent to a record high of 2,777 last year. More than three-quarters of the dead were killed in violence blamed on insurgents.