The blast caused widespread devastation at the compound's main entrance, known as the Assassin's Gate, where many Iraqis had been lined up to enter for work when the busy city street was turned into a battlefield inferno.
Dead and wounded lay on the ground, flames devoured cars and black smoke spewed into the air as US tanks and armoured vehicles sealed off the street near the wall surrounding the coalition's sprawling administrative compound known as the Green Zone.
The grisly attack bore out US officials' predictions of greater bloodshed as insurgents try to derail the coalition's plans to return sovereignty to Iraqis by the end of June.
But US civil administrator Paul Bremer vowed that the "outrage" would fail in its goal as he prepared for crucial talks with UN Secretary General Kofi Annan Monday on a renewed UN role in the transition.
The carnage was the greatest amount of bloodshed since Saddam Hussein's capture on a small farm near his hometown of Tikrit on December 13.
Pandemonium ensued in the moments after the car exploded 100 metres from the cement barrier checkpoint beneath a giant archway erected by Saddam.
"The blast was so strong. I never heard anything like that before," said witness Ahmed Hassan.
"Soldiers panicked. One was thrown to the ground. I saw an Iraqi coalition employee hit the ground. He was wounded. It was so strong."
Combined tolls from hospitals and the military put the number of dead at 25 and the wounded at least 100.
US officers at the scene said the toll was expected to rise yet further as bodies remained trapped in the wreckage of vehicles late Sunday afternoon.
"Twenty cars are still there, 10 of them still have bodies in them," said Specialist Thomas Lindeman just before sunset as soldiers scoured the wreckage and Iraqis wandered with pictures of loved ones, asking if anyone knew their fate.
At least two American civilian contractors were believed to be among the dead, the coalition's deputy director of operations, Brigadier General Mark Kimmitt told reporters, after a white pick-up truck, crammed with 1,000 pounds (500 kilos) of explosives, detonated in front of the checkpoint.
A US military spokesman said three US contractors and three US soldiers counted among the wounded.
Kimmitt labelled the attack a "suicide bomb," and Iraqi police chief General Ahmed Ibrahim quickly denounced it as an "act of terrorism carried out by foreign groups".
In a statement on the coalition website, Bremer said: "Today's terrorist bombing in Baghdad... is an outrage, another clear indication of the murderous and cynical intent of terrorists to undermine freedom, democracy and progress in Iraq.
"They will not succeed." A US army officer said the attack bore the hallmark of foreign involvement through its use of a suicide bomber, while the target suited Saddam loyalists who have waged a violent campaign against Iraqi civilians working for the coalition.
Iraqis opposed to the US occupation have nicknamed the checkpoint used by Iraqis and Western contractors "Traitor's Gate."
It was the bloodiest attack in the Iraqi capital since five almost simultaneous car bomb blasts killed at least 43 people on October 27.