Local doctors said 16 people had been killed and 24 wounded. Witnesses said they saw a car hurtling towards the National Guard Centre on the edge of town just before the explosion.
British Foreign Secretary Jack Straw told a news conference in Baghdad he was impressed by the interim government's election preparations and confident the polls would go ahead.
Parts of Iraq have serious security problems, he said. "But there is another story going on of the new Iraq seeking to break out of the oppression and tyranny of Saddam Hussein and also from the oppression and tyranny of the terrorists."
There was no sign of the violence easing and no breakthrough in talks between a radical Shia militia and the government to end nightly clashes in a sprawling Baghdad slum district.
Interim Prime Minister Iyad Allawi said no deal had been reached with fiery cleric Moqtada al-Sadr's fighters on terms laid down by his government. "There is no ceasefire," he said.
Allawi said Sadr's fighters must surrender their weapons, dismantle arms caches and allow police to return to the streets. They could then benefit from an amnesty.
Sadr's Chief Spokesman Abdel-Hadi al-Daraji told Reuters earlier that talks were going on, but some of the cleric's conditions had not been met. "There's no deal yet," he said.
A source close to Sadr said the cleric was demanding that US forces stop shelling Sadr City, stop arresting Sadr's followers, release all senior Sadr aides being held, and rebuild the district, home to some two million people.
The cleric has also demanded reparations be paid for damage done to the area by sustained US attacks in recent weeks.
The government has dispatched National Security Adviser Kassim Daoud to negotiate with Shia tribal elders and others close to Sadr in recent days to try to defuse the conflict.
A source from Sadr's office said talks with Allawi and Daoud would take place later on Wednesday.
In other violence-related incidents, a roadside bomb killed a civilian and wounded four policemen in the southern city of Basra. A Kurdish tribal leader and a companion were shot dead in the northern city of Mosul.
The US military mounted an overnight air strike on what it said was a safe house used by the network of Jordanian militant Abu Musab al-Zarqawi in the rebel-held city of Fallujah.
It said his associates were meeting in the house at the time. There was no immediate word on casualties.
The US military has pledged to retake all insurgent-held areas this year to ensure that elections can proceed on time.
US and Iraqi forces were pursuing a security sweep in a deadly triangle southwest of Baghdad as part of that plan.
A US spokesman said he expected the operation to last several days, adding that there had been little fighting so far.
The sweep in the area that includes the trouble spot towns of Mahmudiya, Yusufiya and Latifiya follows a weekend offensive that drove rebels from the streets of Samarra, north of Baghdad.