The rocket hit a side street in Baghdad’s Karrada neighbourhood, witnesses said.
US troops have cordoned off the area. The body of one victim lay in the street covered by a sheet, an AP reporter said.
The rocket also destroyed a car and shattered the windows of 10 shops.
The explosion was one of a series of blasts that rocked the capital. Small puffs of white smoke could be seen rising above the former presidential palace in the Green Zone, the headquarters of the US embassy and the interim Iraqi government.
The US military had no immediate information on the attack.
Iraqi commander detained
Meanwhile, American troops have arrested a senior commander of the US-trained Iraqi National Guard for alleged ties to “insurgents”, the military said on Sunday.
Lieutenant General Talib al-Lihaibi, who previously served as an infantry officer in Saddam Hussein’s army, was detained on Thursday in the province of Diyala, northeast of Baghdad, said Lieutenant Colonel Steven Boylan, a spokesman for US-led forces in Iraq.
Boylan said, however, that authorities were trying to clear up confusion over what exact position al-Lihaibi held within the Iraqi National Guard and that further information would be released shortly.
Boylan also declined to provide details on the nature of the general’s suspected ties to fighters waging a 17-month revolt to topple the interim Iraqi authorities and oust US-led forces from the country.
Before the US-led invasion of Iraq in March 2003, al-Lihaibi commanded troops during the 1980-1988 war between Iraq and neighbouring Iran. The general was also an instructor at the Military College in Baghdad.