Police moved quickly to cordon off the area, which is near the central Sitara market.
Rehman Malik, Pakistan's interior minister, inspected the site of the blast, saying he has been warning of possible attacks for some time.
He told Al Jazeera that up to seven suicide bombers could be in Islamabad, ready to carry out operations.
Al Jazeera's Zeina Khodr, reporting from the scene, said it was still too early to say who was responsible.
She said Pakistanis were expressing their dismay at the inability of security forces to prevent such attacks.
"Islamabad has not been spared in the recent wave of violence across Pakistan, and there have been special security measures all across Islamabad," Khodr reported.
Pakistan was marking Republic Day on Monday, although celebrations and the traditional military parades had been called off due to security concerns.