The blast on Wednesday is the latest of a series of attacks since Spain's prime minister offered talks with the group if it renounced violence.
Three people were slightly injured, the city's emergency medical department told Spanish news agencies. The explosion occurred at about 9.30am (0730 GMT) in the working-class San Blas district in the north of the Spanish capital.
Adnan al-Ayubi, an Arab journalist based in Madrid, told Aljazeera nobody was killed in the blast.
Police had cordoned off the area where the bomb went off after an anonymous caller to the Basque newspaper Gara said a bomb would explode inside a Renault van.
Prime Minister Jose Luis Rodriguez Zapatero, speaking in a previously scheduled Senate session shortly after the explosion, said, "The only fate that the terrorist group ETA has is to lay down weapons and dissolve."
The blast was the sixth blamed on ETA since Zapatero announced this month he was willing to hold talks with the separatist group if it renounced its decades-old campaign of violence.
Four bombs exploded at industrial sites in the Basque region on 15 May, two days after parliament endorsed Zapatero's drive for the first talks with ETA since 1999.
Zapatero is willing to hold talks
with ETA if violence ends
Two people were slightly injured.
Last weekend another small bomb exploded in the Basque town of Zarauz. No one was hurt.
ETA had not been blamed for an attack in Madrid since February.
The group is blamed for more than 800 deaths since the late 1960s in a campaign of bombings and shootings aimed at creation of an independent Basque homeland in northern Spain and southwest France.
But it has not staged a fatal attack since May 2003, and the government says the group has been seriously weakened by waves of arrests in recent years.
Zapatero cites these factors as reasons for trying to launch a peace process even though ETA has not declared a ceasefire or made any other prior concession.