Eighteen people were slightly injured, said Beatriz Martin, the city's emergency medical department spokeswoman. The explosion occurred around 9:30 a.m. in a working-class district north of the Spanish capital.
Police cordoned off the area where the bomb went off after an anonymous caller to the Basque newspaper Gara, which often serves as a mouthpiece for ETA, said a bomb would explode inside a Renault van.
Television images showed a large column of black smoke rising from the area of the explosion.
Prime Minister Jose Luis Rodriguez Zapatero, speaking in a previously scheduled Senate session shortly after the explosion, insisted "the only fate that the terrorist group ETA has is to lay down weapons and dissolve."
Police estimated the bomb contained 40 to 44 pounds of explosives, Interior Minister Jose Antonio Alonso told reporters. "The explosion was really a big one," he said.