Aljazeera's correspondent reported that a stationary car exploded outside the Qarma hotel in the Jadiriya area of central Baghdad. The blast was also close to an Australian military checkpoint near the embassy.
US military officials said three Iraqis, including a child, were injured. However, Iraqi sources told Aljazeera's correspondent a child was killed and four people injured.
The hotel was not severely damaged, although several windows were blown out.
Haitham Yusuf, a hotel waiter standing among shattered glass in the lobby, said no Westerners had been in the hotel when the bomb went off.
"We had a few Egyptians and Jordanians staying in the hotel, and we had a newlywed Iraqi couple but they left right after the blast," he said.
Hotels used by foreigners have often been targeted by those resisting the US-led occupation of Iraq.
A mortar round has exploded inside one of the Shia Muslims' holiest shrines in the central city of Najaf, wounding 10 people.
The upper part of one of the main gold-covered gates leading to the shrine of revered Shia Imam Ali was damaged and rubble strewn on the blood-stained floor of the shrine.
Bombs have reportedly been
dropped all over the city
Aides of Shia leader Muqtada al-Sadr said 10 people were wounded in the attack which happened at around 11am (0700 GMT) on Tuesday and blamed it on US troops.
Fresh fighting also raged one kilometre north of the shrine. Heavy black smoke was seen rising from the area.
Violent clashes erupted on Monday evening. Aljazeera's correspondent reported that while al-Sadr's Mahdi Army fighters fired rocket-propelled grenades, US occupation forces responded with tanks opening heavy gunfire.
The correspondent added that Najaf city had been totally paralysed, with people of the city cowering in their homes as bombs had been dropped everywhere.
Officials had also evacuated the city's governorate building and the surrounding departments, added the correspondent.
Five Iraqis were killed and 18 wounded in overnight fighting in nearby Kufa, after 32 people had died in clashes there early on Sunday, 20 of them in a US raid on the town's main shrine.
Meanwhile, one US occupation soldier was killed and four others wounded in a rocket attack on a base northwest of Baghdad, the US military said in a statement on Tuesday.
The attack happened on Monday afternoon and involved soldiers from Task Force Baghdad, a unit responsible for security in the capital, the statement said.
US occupation troops are regularly killed in rocket and bomb attacks either on their convoys or on their bases.
In the past 14 months of occupations, 580 US soldiers have been killed in action in Iraq, according to some estimates.
In a speech on Monday night, US President George Bush pledged to persevere in Iraq despite the violence and despite signs it could get much worse before it gets better.