Among the wounded was an 18.5-year-old Israeli woman from the Arab city of Tira who is in moderate condition and 18-year-old Layan Nasser was killed. A third Israeli woman suffered from shock, while a fourth was unharmed and taken to the police station to give her testimony.
Gov. Vasip Sahin said the attacker, armed with a long-barreled weapon, killed a policeman and a civilian outside the club at around 1:45am Sunday before entering and firing on people partying inside. He did not say who may have carried out the attack.
"Unfortunately (he) rained bullets in a very cruel and merciless way on innocent people who were there to celebrate New Year's and have fun," Sahin told reporters.
Private NTV news channel said the assailant entered the Reina nightclub, in Istanbul's Ortakoy district, dressed in a Santa Claus outfit.
Some customers jumped into the waters of the Bosporus to escape the attack, the report said. NTV television said some of the wounded were foreign nationals, without citing their nationalities.
The whereabouts of the assailant was not known and it was not clear if he had been caught.
Sinem Uyanik was inside the club with her husband who was wounded in the attack.
"Before I could understand what was happening, my husband fell on top me," she said outside Istanbul's Sisli Etfal Hospital. "I had to lift several bodies from top of me before I could get out. It was frightening." Her husband was not in serious condition despite sustaining three wounds."
Police with riot gear and machine guns backed up by armored vehicles blocked the area close to the Reina nightclub, one of the most popular night spots in Istanbul. Several ambulances flashing blue lights arrived on the scene, some taking wounded to hospitals.
The White House condemned what it called a "horrific terrorist attack" and offered US help to Turkey.
White House spokesman Eric Schultz said President Barack Obama was briefed on the attack by his national security team and asked to be updated as the situation developed. Obama is vacationing in Hawaii this week with his family.
National Security Council spokesman Ned Price said the attack on "innocent revelers" celebrating New Year's shows the attackers' savagery.
"Our thoughts are with victims and their loved ones. We continue to work to prevent these tragedies," European Union foreign policy chief Federica Mogherini tweeted.
By Sunday morning, Turkey's interior minister had lowered the original number of foreign nationals killed in the attack to 15.
An estimated 600 people were celebrating inside the club that is also frequented by famous locals, including singers, actors and sports stars. Several shocked revelers were seen fleeing the scene after the attack and the music fell silent.
The country has been rocked by a series of deadly attacks in 2016 carried out by the Islamic State group or Kurdish militants, killing more than 180 people.
On December 10, a double bomb attack outside soccer stadium—located near the Reina nightclub—killed 44 people and wounded 149 others. The attack was claimed by Turkey-based Kurdish militant group, the Kurdish Freedom Falcons. Nine days later, an off-duty Turkish riot policeman assassinated Russian Ambassador Andrei Karlov at a photo exhibition in the capital, Ankara. The government has suggested that a movement led US-based Muslim cleric Fethullah Gulen was behind the killing—an accusation the cleric has denied.
Justice Minister Bekir Bozdag vowed that Turkey would press ahead with its fight against violent groups.
"Turkey will continue its determined and effective combat to root out terror," Bozdag said on Twitter.
Security measures had been heightened in major Turkish cities, with police barring traffic leading up to key squares in Istanbul and the capital Ankara. In Istanbul, 17,000 police officers were put on duty, some camouflaged as Santa Claus and others as street vendors, Turkey's Anadolu news agency reported.
Hassan Shaalan and Itamar Eichner contributed to this report.