The Ta'ang National Liberation Army (TNLA), made up of fighters from the Ta'ang or Palaung ethnic group, said the group had attacked a casino run by militiamen and a Myanmar army post on the outskirts of border town Muse, a few hundred meters from a river that separates Myanmar's northern Shan state and China's Yunnan province.
Myanmar's military frequently clashes with several groups who say they are fighting for greater autonomy for ethnic minorities in the area, through which much of Myanmar's foreign trade flows.
The conflict, including in the northern-most state of Kachin, has escalated over the past month as the global focus remains on the Rohingya crisis in the west of the country.
The army has been accused of systematic human-rights violations against the ethnic Rohingya Muslim minority in the western state of Rakhine, forcing more than 700,000 Rohingya to flee to neighboring Bangladesh since August.
TNLA spokesman Major Mai Aik Kyaw told AFP that the group attacked joint military and militia posts in the Shan state town of Muse and on a road to Lashio. "We do not know what was going on and who was fighting", said Muse resident Aye Aye.
"We fight because of heavy fighting in our region and the serious offensive in Kachin State", he said, referring to fresh confrontations in Myanmar's northernmost state between the military and the TNLA-aligned Kachin Independence Army. "It is just a destructive terrorist attack".
A further 20 civilians were wounded, a spokesman said.
The Ta'ang National Liberation Army claimed responsibility for the attack.
But the effort has been severely hampered by a surge in fighting between Myanmar security forces and an alliance of rebel groups in northeastern Shan and Kachin states.
Reverend Hkalam Samsun, chairman of the Kachin Baptist Convention, said the Kachin people were "disappointed" with Suu Kyi.
Suu Kyi placed the peace bid - an effort to extinguish around two dozen complicated and long-running ethnic conflicts across the country - at the top of her agenda after she was elected to office in landmark 2015 elections.