The bomb, which was concealed in a rubbish heap close to the Masbah hotel in the upmarket Karrada district, exploded around 0730 GMT, but there were no immediate reports of casualties.
According to a US soldier, the blast was caused by an improvised explosive device of the sort regularly used to deadly effect by fighters targeting military patrols across Iraq.
Witness, Akil Abu Zahra said the blast was powerful enough to throw one of the vehicles into the air.
“I was in the street when the second car passed by and the explosion occurred. I saw the vehicle lifted into the air,” she said.
Another witness Sajida Naama said she saw four men wandering around the rubbish heap shortly before the explosion.
A US occupation soldier died on Sunday from wounds he suffered when fighters fired a rocket-propelled grenade at his armoured vehicle, the US Army said.
A spokeswoman for the US 4th Infantry Division, Major Josslyn Aberle, said the attack occurred on Saturday night near the town of Baiji, north of the Iraqi capital Baghdad.
“A 4th Infantry Division soldier was critically wounded when attackers fired an RPG at the Bradley Fighting Vehicle he was in,” she said, adding the soldier died on Sunday after surgery.
US soldiers returned fire and several people had been held for questioning after the attack, Aberle said.