Flames resulting from the blast spread to neighbouring buildings. Firefighters were on the scene tackling the blaze. There was no immediate information on the cause of the explosion.
A further eight people were wounded in the blast.
Earlier, the United Nations announced it was withdrawing its foreign workers from Baghdad for talks on security, following Monday’s human bomb attack on the International Committee of the Red Cross (ICRC) which killed 12 people.
“We have asked Baghdad staff to come out temporarily for consultations with people from headquarters on the future of our operation,” spokeswoman Marie Heuze told Reuters.
Most of the UN’s foreign staff had already been pulled out following an August truck bomb strike on their Baghdad headquarters which killed 22 people, including head of mission Sergio Vieira de Mello.
“We have seen plenty of signs of solidarity since the bombing. Families of detainees, contractors and hospitals that we work with have been coming to our headquarters to plead with us to stay in Iraq”
A UN spokesman in New York said there were about 60 international staff in Iraq, with most of them in the north and about a dozen in Baghdad. Staff in the north were not being withdrawn, the world body said.
The ICRC has also decided to reduce its presence in Iraq. It announced on Wednesday it was pulling out some foreign staff following Monday's bombing but stated it would not cease operating in the country.
“We have seen plenty of signs of solidarity since the bombing,” Spokeswoman Nada Doumani told AFP. “Families of detainees, contractors and hospitals that we work with have been coming to our headquarters to plead with us to stay in Iraq.”
Iraq's police chief appealed to foreign aid agencies not to evacuate despite the dangers of working in Iraq.
Monday's strikes on the ICRC, a non-aligned charity that has in the past worked in all the world’s war zones without fear of attack, and the coordinated targeting of police stations in Baghdad resulted in the deaths of at least 35 people.
In a further sign of deteriorating security in Iraq, the number of US soldiers killed in action since President George Bush declared an end to major hostilities on 1 May exceeded for the first time those killed in combat during the March invasion.
Bush has blamed both foreign fighters and Baath party loyalists for the attacks.
In a separate attack a US Army Humvee vehicle was damaged after an exploive device was detonated. There are no reported casualties.