No other details were immediately available about the blast on Sunday in the commercial Karrada district, which came hours after al-Qaeda in Iraq vowed to carry out large-scale attacks that would "shake the enemy" after the killing of its leader Abu Musab al-Zarqawi.
US and Iraqi officials hailed the killing of al-Zarqawi in a US air strike on Wednesday as a major victory in the war against terrorism but said his death would not bring an end to bloodshed plaguing Iraq.
Earlier in the day, at least five Iraqis were killed and a British soldier wounded after a firefight between Mahdi Army fighters and British soldiers in the southern town of Amara, police said.
"Five people were killed, including one woman, and 15 were wounded," said Lieutenant Ali Aziz of the Amara police on Sunday, adding that the armed men were members of the militia of Shia leader Muqtada al-Sadr.
British military spokesman Lieutenant-Colonel Richard Eaton confirmed there was a clash but declined to speculate on the identity of the attackers or the number of casualties.
"There were a series of firefights where multinational troops were engaged from a variety of places," he said, adding that they began at 3am (2300 GMT on Saturday) and lasted over an hour.
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"There was quite sustained gunfire, RPG and small arms fire," he said referring to rocket-propelled grenades. "It is probable that some terrorists were killed."
One British soldier was wounded and a Warrior armoured vehicle became stuck in a ditch and had to be recovered, he said.
Amara police reported a British vehicle in flames. Eaton said the situation was still confused and it is not clear if it was a single incident that mushroomed as armed men joined the fray or if there was a substantial force already in place waiting for the patrol.
Amara, just north of Basra, is the scene of heavy militia activity where British soldiers regularly come under attack.
The once peaceful area of British control in Iraq, at least compared to the west and centre of the country, has in the last month experienced an upsurge of unrest due to increased militia activity.