With a warehouse on one side and a six-storey block of council flats on the other, Sidney Street in Stepney, east London, is a drab thoroughfare nowadays. But 100 years ago tomorrow morning it was the scene of the most extraordinary gun battle waged on the streets of London.

Crowds of spectators and the home secretary – a rising young politician called Winston Churchill – watched as Scots Guards and police exchanged fire for six hours with gunmen holed up in a tenement. Maxim machine guns were called for and the Royal Horse Artillery clattered up with 13-pounder guns, though too late to take part.

The siege of Sidney Street carries startling resonances even now. It was, arguably, the first breaking-news story: a film shot by newsreel cameramen was shown that evening in a West End theatre. The presence of the 36-year-old Churchill, who can be seen in the film gesticulating towards the police, was an early photo opportunity.

Two Latvian gunmen killed in the shootout were at first thought to be Jewish anarchists and views on immigration ran through the coverage of the event. The Times described them as "some of the worst alien anarchists and criminals who seek our too-hospitable shore".

Sir Robert Anderson, a former head of the CID at Scotland Yard, denounced "the mollycoddling attitude towards criminals by the Radical government [sic] and a certain so-called humanitarian section of the general public". The even though 1905 Aliens Act, blamed for letting undesirables in, had been introduced by the previous Conservative administration.

The incident began more than a fortnight earlier when police disturbed a burglary at a jeweller's shop a mile away in Houndsditch. A plate-glass office block now stands on the site, but then it was a row of small shops.Aneighbour heard banging on a quiet Friday night as the robbers tried to tunnel in from next door.

When police arrived, the robbers burst out, shooting three officers dead. The gang leader, a young Latvian called Poloski Morountzeff who had probably shot the constables, was hit in the back by an accomplice and his body found the next day in rented rooms. The coroner made a point of stressing "in justice and fairness to the Jewish community" that he was uncircumcised.

The gang scattered and the police made it no secret that they were looking for anarchists, particularly a figure known as Peter the Painter. Some members of the gang had visited an anarchist club in Stepney, but probably to meet fellow east European refugees rather than for political motives. The man sought by police was probably Peter Piaktow, a Polish decorator, but there is no evidence that he had any direct connection with the gang. Peter the Painter was never found and may not even have existed.

Acting on a tip-off, police arrived at a tenement at 100 Sidney Street late on 2 January. They were met with firing from inside, beat a retreat and surrounded the building. Residents went about their business as usual, and the local postman continued his round nearby. Churchill, told of the siege while taking his bath, hurried to the scene out of what he described as "a strong sense of curiosity which perhaps it would have been well to keep in check". He was greeted in Stepney with cries of "who let them [immigrants] in?" and, according to the Manchester Guardian, an admiring shout of "he's a cool one".

Churchill authorised the deployment of troops: 74 members of the Scots Guards from the Tower of London, 35 members of the Royal Horse Artillery and 15 Royal Engineers to blow up the house, as well as several hundred police.

Police and troops, lying on newspaper placard boards, crouching in doorways and lurking in nearby houses, kept up a steady exchange of fire with those inside the house.

The Manchester Guardian's anonymous reporter took refuge with other journalists on the roof of a nearby pub. He wrote: "The firing came in spurts. The murderers would shoot first from the ground floor, then the window above … then there would be a barking of rifles in reply.

"Close on one o'clock an especially sharp fusillade rattled like a growl of exasperation …. a little feather of smoke curling out of the window below the point of attack. We thought at first it was gun smoke and then with a thrill we saw that the house was on fire … 'Now they are done for,' we said, 'this is the beginning of the end.'

"But the soldiers had no mercy. They showered their lead into the smoke ... A youth of the neighbourhood chuckled in unholy exultation. 'They'll be fried like rats in an oven,' he said."

Churchill refused to allow the fire brigade to douse the flames until the firing from inside stopped. When it did and the police were allowed in, only two bodies were found. One policeman had been wounded in the fight, but a fireman, District Officer Charles Pearson, was fatally injured as a hearthstone fell on him from an upper storey.

The lesson the police took from the siege was not that they had overreacted but that they needed better weapons. The lesson the press took was that the Liberal government was soft on immigrants.

If you go down Sidney Street bears no sign of the battle today, and no memorial. Further down the street, identical blocks of dark brick Victorian tenements are still occupied by immigrants, but now they are Muslim, not Jewish.

The two dead men, identified as Fritz Svaars and William Sokolow, had been petty criminals, not anarchists. Seven others were put on trial at the Old Bailey but all had their cases dropped or were acquitted for lack of evidence.

One of them, Jacob Peters – who may even have been the Painter – returned to Russia, rose to be deputy head of the Soviet secret police, the Cheka, and was executed in Stalin's 1938 purge.

Churchill's colleagues took his presence, especially being photographed, as an example of his rashness and lack of judgment. The Tory opposition leader, Arthur Balfour, said: "I understand what the photographer was doing, but what was the right honourable gentleman doing?"

Churchill knew he had gone too far but, still excited when he arrived back at the Home Office, he lisped at his secretary, who recorded his remark as follows: "Now Charlsh, don't be crosh; it wath such fun."