The explosion came only hours after Syria's foreign minister held a rare meeting in New York with his American counterpart, Secretary of State Condoleezza Rice.
State-run television said a car packed with an estimated 440 pounds of explosives blew up on a road on the capital's southern outskirts, wounding dozens and shattering car and apartment windows. The charred booby-trapped car sat in the street near a primary school.
The blast knocked down part of a 13-foot-high wall surrounding a security service complex that houses several buildings in the Sidi Kadad neighborhood.
Syrian Interior Minister Bassam Abdul-Majid called the bombing a "terrorist act." He said all the victims were civilians, although at least one of the injured was a traffic policeman.
Officials provided no other details of the attack, which was the worst since a truck bomb killed dozens of people in the mid-1980s.
"We cannot accuse any party. There are ongoing investigations that will lead us to those who carried it out," Abdul-Majid told state TV.
Serious attacks are rare in Syria, a tightly controlled country where the government uses heavy-handed tactics to suppress dissent and keep stability.
But the country is also home to Palestinian extremists and is a close ally of the Shiite Muslim militant group Hezbollah in neighboring Lebanon. Washington accuses Syria of being a state sponsor of terrorism and allowing Muslim militants to use its territory to cross into Iraq.
Syria denies that, arguing that it has an interest in fighting Islamic extremist groups like al Qaeda. The secular regime of President Bashar Assad has been battling Muslim militants blamed for a string of smaller bombings and attacks on the government and diplomatic missions in recent years.
In September 2006, Islamic militants tried to storm the U.S. Embassy in Damascus in an unusually bold attack in which three assailants and a Syrian guard were killed. Three months earlier, a battle between Syrian security forces and militants near the Defense Ministry left four militants and a police officer dead.
Officials blamed those attacks on Jund al-Sham, or Soldiers of Syria - an al Qaeda offshoot that was established in Afghanistan. Militants often denounce Assad's regime for its secularism and have at times called for its overthrow.
Though Syria has long been viewed by the U.S. as a destabilizing force in the Mideast, Damascus has been trying in recent months to change its image and end years of global seclusion.
Assad has pursued indirect peace talks with Israel, mediated by Turkey, and says he wants direct talks next year. Syria also has agreed to establish its first formal diplomatic ties with Lebanon, a neighbor it used to dominate both politically and militarily, and says it has stepped up efforts to stem the flow of militants into Iraq.
European, American and Arab officials are increasing their visits to the country after years of avoiding it. Most recently, French President Nicolas Sarkozy joined the leaders of Turkey and Qatar in a meeting with Assad in Damascus.
State Department spokesman Sean McCormack condemned the bombing. "This attack is particularly abhorrent as it comes during the holy month of Ramadan. We extend our deepest sympathies to the victims and their families," he said.
Ibrahim Bayram, a political analyst at Lebanon's leading newspaper, An-Nahar, speculated Saturday's bombing was the result of a "tacit confrontation" between the Syrian government and al Qaeda-linked Sunni militants after Damascus tightened its long desert border with Iraq.
"For months, the Syrians have been preparing to face such attacks after they decided to stop militants from crossing its border into Iraq," said Bayram, whose newspaper often takes an anti-Syria line.
While calling the bombing a "terrorist act," Syrian Foreign Minister Walid al-Moallem denied it was a security breach.
"I hope that you will be sure that security (forces) in Syria will always be awake and watching over the citizens," al-Moallem told Al-Arabiya satellite TV in an interview from New York, where he was attending the U.N. General Assembly meeting.
The explosion occurred just several miles away from the Sit Zeinab shrine, which hosts hundreds of thousands of Iraqi and Iranian pilgrims, reports CBS News' George Baghdadi.
Mohammed Shubli, the owner of a toy shop, said he saw columns of smoke rising in the sky.
"My house was completely damaged by the force of the blast," he said.
The last major explosion to strike Damascus was in February, when a car bomb killed the commander of Lebanon's Hezbollah group, Imad Mughniyeh. Hezbollah and its top ally, Iran, blamed Israel for the assassination, but Israel denied any involvement.
Last month, Brig. Gen. Mohammed Suleiman, a senior military officer close to Assad, was assassinated by a sniper on a yacht at a beach resort in the northern port city of Tartous. Syria has provided little information about the shooting.
The last major bombing was on New Year's Eve in 1997, when a blast on a public bus in Damascus killed 12 people and wounded dozens. Syria accused Israel, but the Jewish state denied the charge.
During the late 1970s and early 1980s, Syria's hard-line government fought a fierce war with Islamic militants of the Muslim Brotherhood. The deadly truck bombing in the mid-1980s was one in a series of Iraqi-backed attacks.