A bomber on Monday attacked a convoy and rammed one of three civilian sports utility vehicles outside one of the main entrances to the heavily fortified Green Zone, home to the US and British embassies and to Iraqi leaders, nicknamed "Assassins' Gate" by US forces.
The explosion killed two South Africans and wounded three others working for a US State Department security contractor DynCorp International, US embassy spokeswoman Elizabeth Colton said.
The wounded included an American, an Iraqi and a South African, Colton said.
An earlier police report said one of their men was killed and four wounded along with three civilians.
The explosion was followed by small arms fire and billowing black smoke that could be seen across the city.
The blast occurred near the Iranian embassy, about 100 metres north of the Green Zone gate, which is surrounded with blast walls.
Two Apache attack helicopters were soon flying over the scene as the smoke cleared and sporadic gunfire continued in the area.
Operation Steel Curtain
The US military said on Monday air raids had killed about 37 people in the latest phase of an anti-al-Qaida operation near the Syrian border in western Iraq and 25 others had been captured.
Operation Steel Curtain involves
3500 US and Iraqi soldiers
Operation Steel Curtain, launched just more than a week ago, entered a new phase on Monday, the US military said, when US and Iraqi troops moved into the town of Ubaydi, on the banks of the Euphrates river, 20km from the border.
"Five targets were struck by coalition air strikes resulting in an estimated 37 insurgents killed," a statement said.
"The insurgents were engaging coalition forces with small arms fire at the time of the strikes."
"Insurgent fighters have been battling with Iraqi and coalition forces since the operation began at dawn," it said.
About 2500 US soldiers and 1000 Iraqi soldiers have already swept through the towns of Qusayba and Karabila, clearing houses and battling with armed groups, in what the US military says is an offensive aimed at rooting out foreign fighters coming in through Syria to fuel violence.
Meanwhile, the US command has announced the death of three more American soldiers.
In a statement on Sunday, the US command said two marines were killed the day before by a bomb west of Baghdad and an American soldier died in a vehicle accident in western Iraq.
The latest deaths brought to 2065 the number of US military personnel who have died since the war began in 2003, according to an Associated Press count.