A witness said the attack late on Wednesday afternoon apparently targeted two US Humvees patrolling the area. Police said there were several casualties.
The blast was Baghdad's second car bomb attack in a day.
Earlier, a car-bomb in west Baghdad's busy Rabia street killed at least 15 and wounded 50. Iraqi journalist Husayn al-Shammari told Aljazeera the blast targeted volunteers for the Iraqi National Guard.
"They had assembled in the morning at the same recruitment centre where US forces detonated a booby-trapped car on Tuesday. But local residents prevented them from queuing up at the centre, located behind al-Mulla Hwaish mosque on Rabia Street," al-Shammari said.
"So the volunteers queued up a kilometre away from the centre, near a building called Madinat al-Hasibat. Soon afterwards, a car bomb exploded close by."
Besides the fatalities, the blast destroyed 25 shops in Madinat al-Hasibat, al-Shammari said.
More US losses
As thick black smoke spiralled into the sky and shards of glass and debris littered Rabia street, US soldiers in armoured vehicles cordoned off the area and firefighters doused burning cars.
Wednesday's blasts were the latest in a two-week-long wave of car bomb attacks in the Iraqi capital.
A Black Hawk helicopter crashed
in southern Iraq, injuring three
In other developments, a US soldier was killed in an attack on a patrol in the northern city of Mosul on Wednesday, the US military said, a few hours after another soldier died in a roadside bomb attack in Tikrit, just north of Baghdad.
Overnight, a US Black Hawk helicopter crashed shortly after takeoff in southern Iraq, wounding three crew members, the US military said.
The helicopter went down near the city of Nasiriya, 375km south of Baghdad.
"The three crew members sustained minor injuries and the aircraft was severely damaged," a military spokesman said, adding that a military investigation was under way.
Zarqawi aide killed
Meanwhile, Iraqi sources said the head of the legislative body of the al-Tawhid and al-Jihad group, responsible for the capture and beheading of two Americans, has been killed in Iraq.
The sources said Umar Yusuf Jumaa, also known as Abu Anas al-Shami, was killed on Friday in a US air strike targeting his vehicle in Abu Ghraib.
Al-Shami, 35, was believed to be one of two main figures on the group's website, Aljazeera's correspondent in Amman, Yasir Abu Hilala, said. The other person mentioned on the site is Abu Musab al-Zarqawi, who is alleged to have ties to the al-Qaida network.
Described as a prominent Muslim scholar in Jordan, al-Shami was considered the legal brain of the group.
Abu Anas al-Shami, a top aide
to Zarqawi, was killed on Friday
Al-Shami, who left Iraq for Jordan after the US-led invasion, is said to have been responsible for issuing fatwas (Islamic edicts) on the website.
Al-Tawhid and al-Jihad last week captured two Americans and a British national working in Iraq and threatened to behead them unless their demands for female prisoners to be released were met.
The two Americans have since been executed and their bodies found by Iraqi police.
Relatives of the British hostage have appealed to British and Iraqi officials to heed the captors' demands.