Several bodies were being pulled out of the rubble of the Mount Lebanon Hotel, a small hotel used mainly by Iraqis and Arabs, in the Karrada district. Up to 41 people have been injured in the explosion.
Aljazeera's bureau, located behind the hotel, was also badly damaged in the explosion on Wednesday evening.
"It has to be a car bomb. No rocket could cause that amount of damage," said Pfc. Heath Balick of the US Army's 1st Armored Division, which is responsible for security in Baghdad.
Another military spokesperson, US Colonel Ralph Baker is reported as saying "it looks like the bomb was 1000 pounds of plastic explosives and artillery shells mixed in with explosives to create more injuries."
Earlier, Iraq's deputy interior minister said at the scene a rocket attack was suspected.
The hotel, neighbouring buildings and several cars were ablaze, and rescuers said many people were trapped under the rubble. The blast sent a column of flame and smoke into the night sky. Eight cars were on fire, and one vehicle was hurled by the blast into a store.
The blast also shook the nearby Palestine Hotel, where many foreign contractors and journalists are based.
Ambulances and police cars raced to the scene, and crowds of frantic Iraqis rushed there to look for friends and relatives.
More than 40 people have been
injured in the explosion
Half a dozen dazed and injured people stumbled from the wreckage. A father cradled his young daughter, who was limp in his arms.
Earlier, two US soldiers reportedly tried to help pull bodies from the wreckage of the hotel, but angry Iraqis pushed them back.
A huge crater around seven metres across and 10 feet deep was blown out of the road outside the hotel.
Hotels have been targeted several times in the past by fighters resisting the US-led occupation of Iraq.
The explosion occurred near Firdaus Square, where a statue of Saddam was symbolically toppled on 9 April last year when US troops invaded the city.
Meanwhile, an Iraqi Governing Council member, in an interview with Aljazeera satellite channel, described the blast as a "criminal act".
"We denounce this crime which is perpetrated by non-Iraqis who seek to scare us", said Sangul Chabuk, who was in the vicinity of the hotel when the blast occurred.
"I am accusing the US for leaving our borders open and unguarded ... this is not the work of Iraqi citizens because Iraqis will not kill their fellow Iraqis"
Member, Iraqi Governing Council
The Iraqi people, she said "do not deserve to be harmed".
In reply to who she thought was behind the blast, Chabuk said "since our borders are wide open and the weapons are plentiful…I am accusing the US for leaving our borders open and unguarded."
"This is not the work of Iraqi citizens because Iraqis will not kill their fellow Iraqis."
The death toll is expected to rise
due to the powerful blast
Chabuk called upon "our neighbouring countries to stop infiltrators from coming into Iraq. We have to equip our police force to counter such crimes."
The IGC member further said the bombing is aimed "at scaring off the companies that came to assist us in the reconstruction of Iraq" she said.
Chabuk was adamant that it was the "duty of the United Nations to come over immediately to help the Iraqis to maintain security since we don’t have an army or police force".