The deadly blast occurred in the Shiite-dominated neighborhood of Amil, damaging a nearby medical center and other buildings and setting cars on fire, police said.
The neighborhood has seen an increase in violence in recent weeks, and Sunni politicians have expressed fears that Amil was witnessing a resumption of sectarian cleansing by Shiite militiamen.
Meanwhile, a military spokesman said Tuesday that U.S. soldiers had raided suspected safehouses near the Euphrates River south of Baghdad in their search for three captured comrades.
But the spokesman says soldiers found the safehouses empty after the militants were apparently tipped off and fled.
It's the latest in a series of frustrations for exhausted U.S. troops hunting for any sign of the missing soldiers, who haven't been seen since a May 12th assault on an outpost by insurgents linked to al Qaeda. Four other Americans and an Iraqi soldier died in the attack.
The military spokesman says 27 airborne operations have been staged during the widespread search in an effort to gain the element of surprise and to avoid roadside bombs.
Earlier, in the nearby Khadra neighborhood, gunmen in two cars ambushed a civilian car carrying three plainclothes police officers from the major crimes unit, killing two and wounding the third, police said.
Police and other Iraqi security officers have been targeted by insurgents, who accuse them of collaborating with U.S.-led forces in the country.
Another police officer was killed when a roadside bomb exploded next to a police patrol driving through an eastern Baghdad neighborhood about 9 a.m., police said. Three other officers were injured in the attack.
In other developments:
In Washington, after weeks of refusing to back down to President Bush on setting a timetable on the Iraq war, House Democratic leaders soon will be in the awkward position of explaining to members why they feel they must.
Party officials said Monday the next war spending bill most likely will fund military operations and, although it will contain other restrictions on Bush's Iraq policies.
On May 1, Bush vetoed a $124.2 billion bill that would have paid for combat in Iraq and Afghanistan through September as Bush requested, but demanded that troops start coming home this fall.
Democrats say they hope to send Bush a new bill by the end of the week he will sign, and troops in combat will get the resources they need without disruption.
"I'm frustrated" with the war, said Rep. Joe Baca, D-Calif., a member of the Blue Dog coalition, a group of conservative Democrats. "But we realize too we have a responsibility to fund our troops and make sure they have the right equipment."
But Democratic leaders first will have to sway a large number of Democrats who want to end the war immediately — or pick up enough Republican votes to make up for the losses. Earlier this month, 171 House members voted to order the withdrawal of combat forces from Iraq within nine months.
The details of the Democrats' new bill remained in flux late Monday, as Rep. David Obey was tasked with negotiating with the Senate and White House. Obey, D-Wis., is chairman of the House Appropriations Committee.
Officials said the legislation was expected to include political and military goals for the Iraqi government to meet toward establishment of a more democratic society. Failure to make progress toward the goals could cost the Iraqis some of the reconstruction aid the United States has promised, although it was not clear whether Democrats intended to give Bush power to order the aid to be spent regardless of progress.