At least two American civilian contractors were believed to be among the dead, said the occupation force's deputy director of operations, Brigadier General Mark Kimmitt.
It was the deadliest assault yet on the symbol of the US-led occupation of Iraq, although the buildings inside the administrative compound known as the Green Zone suffered only superficial damage.
The bombing came on the eve of a key meeting in New York at which US occupation administrator Paul Bremer and members of Iraq's interim leadership will try to persuade the United Nations to send staff back to the war-torn country, five months after a similar blast drove them out.
A senior US officer in Baghdad said the attack was probably aimed at Monday's meeting.
The attack came during the morning rush hour and as the capital was blanketed in mist.
The bomber was driving a white Toyota pick-up truck packed with 500kg of explosives and detonated it 100 metres from a checkpoint known as Assassin's Gate just after 8am (05:00 GMT), Colonel Ralph Baker told reporters.
The blast turned the busy street outside the compound into an inferno which devoured cars and had flames licking at the brick walls sealing off the Green Zone.
A spokesman said the US military had counted at least 20 people killed and 63 wounded, while another five people were reported dead and 37 wounded at Baghdad hospitals.
"It would appear from all the indicators this was a suicide bomb. We have indication that some of those that were killed were US citizens, US contractors. We believe the current number is two," said Kimmitt.
There were also three US soldiers and three American civilian contractors among the wounded, a US spokesman said. The military said its toll was not counting those people brought to local Iraqi hospitals.
Unemployed among victims
A large number of people had been queuing for work inside the compound, when the blast occurred.
Iraqis queuing at the compound
were among dead and wounded
According to Aljazeera's correspondent, a vehicle, the pick-up truck model which is used by US officials or guests of the occupation authorities, stopped at the main gate of the strictly-secured compound.
As a soldier approached the vehicle, for a security check, it exploded.
Glass and shrapnel were scattered up to 600 metres from the site of the blast.
Reuters television footage showed wounded people lying near a gate to the high security Green Zone.
The area is home to the US civilian and military base in the Iraqi capital inside a former palace of ousted dictator, Saddam Hussein. Cars were on fire in the background as smoke spewed into the sky.
One witness, quoted by AFP, said a car lining up to enter the compound that exploded.
"Soldiers panicked. One was thrown to the ground. I saw an Iraqi employee hit the ground. He was wounded. It was so strong. The blast was so strong. I never heard anything like that before".
"I saw an Iraqi employee hit the ground. He was wounded. It was so strong. The blast was so strong. I never heard anything like that before"
Witness to the blast
Another witness, an Iraqi employee of the US authorities, who was waiting to enter the compound, said he saw five bodies lying on the street.
"There was a pick-up truck and six GMC cars," the witness said.
GMC sports utility vehicles are often used by western contractors and occupation authority employees.
Two British soldiers were injured in a bomb blast in Basra on Sunday, one seriously, according to Iraqi traffic police.
Two Iraqi officers also received minor injuries when the explosion happened at 06:00 GMT local time.
Iraqi traffic police said the blast happened when a British military convoy approached a crossing.
The explosion followed the car bomb blast in Baghdad.