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"I saw the plane from the direction of the airport and it was tilting already, then I saw smoke billowing," a local resident told the AFP news agency.
Air Force Chief of Staff Agus Supriatna told Metro Television that the pilot had asked to return to base because of technical difficulties shortly before the crash.
Correspondents say that it is the second time in 10 years that a plane has crashed into the Medan neighbourhood.
In September 2005, a Boeing 737 came down in a crowded residential area shortly after take-off from Medan's Polonia airport, killing 143 people including 30 on the ground