The explosion near al-Karama hotel is believed to have been caused by a booby-trapped car parked next to a restaurant where members of the Iraqi police force were dining.
A US officer at the scene of the blast said at least 20 people were injured in the blast, but others put the number of wounded much higher.
Witnesses said heavy smoke was seen rising from the site of the explosion. Ambulances rushed to the site to transport injured people.
Aljazeera has also learned that a US drone (pilotless reconnaissance aeroplane) was shot down in the south-eastern district of al-Shuhada in Falluja.
The Islamic National Resistance Brigades and the al-Tawhid wa al-Jihad group have both claimed responsibility for downing the drone.
Elsewhere in the capital, an unknown group blew up a new building set to be inaugurated within two days to house the US-established Iraqi National Guard in the Syadiya district.
The blast caused no casualties.