Police and witnesses say the pre-dawn explosion occurred inside a car carrying four people in a residential neighborhood of central Jakarta. Authorities say one person was killed, the driver was detained and two passengers got away.
"The grenade that exploded ... was planned to be thrown at an empty building belonging to the U.S. Embassy, but it exploded inside the car," said national police chief Da'i Bachtiar.
Bachtiar said that the arrest of one suspect led police to the city of Bogor, 35 miles south of Jakarta, where more weapons and explosives were found during raids on two homes.
He said the cache included TNT, two pistols and 100 bullets.
The U.S. Embassy was closed on Sept. 10 for six days due to what U.S. Ambassador Ralph Boyce called a "credible and specific threat" that he suggested was linked to the al Qaeda terrorist network.
Though now open, the embassy has cautioned U.S. citizens to stay away. A concrete barricade erected last week runs the length of the complex as a deterrent against bomb attacks.
Indonesia is the world's most populous Muslim country. The government has been cooperating with the U.S.-led war on terror and has come under fire from some radical groups that accuse it of being too close to Washington.
After Monday's explosion, survivors in the car tried to flee the scene but neighborhood residents chased after them, capturing the slightly injured driver and holding him until police arrived, police and witnesses said.
The explosion took place about 3:30 a.m. in a residential area just yards away from a home belonging to the U.S. Embassy, according to city police chief Col. Edmon Ilyas.
Police are interrogating the driver Monday and were trying to establish a motive. Ilyas says the two surviving passengers in the car got away.
Police suspect the dead man, Ahmad Azis, was handling the grenade in the front seat of the car when it unexpectedly exploded.
Witnesses say the car swerved after the blast, hitting a concrete curb. There was no damage to any of the buildings in the area. The wrecked car was towed to the police headquarters for further investigation.
Bambang, a resident who heard the blast and helped chase down the car's driver, said he and others tried unsuccessfully to find out what had happened. He said the driver was running slower than the others because of a slight injury, the nature of which he said he didn't know.
"The man kept changing his story about what he was doing," said Bambang, who like many Indonesians uses a single name.
Jakarta Police Spokesman Col. Bahrul Alam said the driver, identified solely as Yusuf, carried an identity card issued in Ambon, the capital of Maluku Province while Aziz resided in Bogor.
Alam said it is too early to link the explosion with the violence in Maluku.
The region, about 1,600 miles east of Jakarta, has been wracked by three years of fighting between Christians and Muslims that has killed around 9,000 people.
By Lely T. Djuhari