The attacker blew himself up inside US property, Ankara Governor Alaaddin Yuksel said. The blast sent masonry spewing out of the wall and could be heard a mile away.
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Interior Minister Muammer Guler said the bomber was a member of a far-left group. The US State Department said it was working with Turkish police to investigate what it described as "a terrorist blast."
Islamist radicals, far-left groups, far-right groups and Kurdish separatist militants have all carried out attacks in Turkey in the past. There was no claim of responsibility.
"The suicide bomber was ripped apart and one or two citizens from the special security team passed away," said Turkish Prime Minister Tayyip Erdogan, who was attending a ceremony in Istanbul when the blast happened.
"This event shows that we need to fight together everywhere in the world against these terrorist elements," he said.
Far-left groups in Turkey oppose what they see as US influence over Turkish foreign policy.
Turkey is a key US ally in the Middle East with common interests ranging from energy security to counter-terrorism, and has been one of the leading advocates of foreign intervention to end the conflict in neighboring Syria.
Around 400 US soldiers have arrived in Turkey over the past few weeks to operate Patriot anti-missile batteries meant to defend against any spillover of Syria's civil war, part of a NATO deployment due to be fully operational in the coming days.
Scene of embassy attack (Photo: EPA)
Bomber blows door off side entrance (Photo: AFP)
Wounded person evacuated by rescue forces (Photo: AP)
US Ambassador Francis Ricciardone emerged through the main gate of the embassy, which is surrounded by high walls, shortly after the explosion to address reporters, flanked by a security detail as a Turkish police helicopter hovered overhead.
"We are very sad of course that we lost one of our Turkish guards at the gate," Ricciardone said, thanking the Turkish authorities for a prompt response.
A Reuters witness saw one wounded person being lifted into an ambulance as police armed with assault rifles cordoned off the area.
"It was a huge explosion. I was sitting in my shop when it happened. I saw what looked like a body part on the ground," said travel agent Kamiyar Barnos, whose shop window was shattered around 100 meters away from the blast.
State broadcaster TRT said the attacker was thought to be from The Revolutionary People's Liberation Party-Front (DHKP-C), which wants a socialist state and is vehemently anti-American, according to the US National Counterterrorism Center (NCTC).
The group, deemed a terrorist organization by both the United States and Turkey, was blamed for a suicide attack in 2001 that killed two police officers and a tourist in Istanbul's central Taksim Square.
Guler said the bomber could have been from the DHKP-C or a similar group.
The DHKP/C has in the past attacked Turkish official targets with bombs, but arrests of some of its members in recent years have weakened its capabilities, according to the NCTC.
The date of the DHKP-C's most recent attack, on an Istanbul police station, was September 11, 2012, seen as a symbolic strike to coincide with the 11th anniversary of the al Qaeda attacks on the United States.
Despite some strains, Washington and Ankara have long had a strong strategic alliance. US President Barack Obama chose Turkey as his first Muslim nation to visit after he took office five years ago.
Turkish support and bases have helped US forces in Afghanistan, while Turkey hosts a NATO radar system, operated by US forces, in its eastern province of Malatya to help defend against any regional threat from Iran.
More recently, it has led calls for international intervention in neighboring Syria and is hosting hundreds of NATO soldiers who are manning the Patriot missile defense system near the Syrian border, hundreds of kilometers from the capital.
The US consulate in Istanbul warned its citizens to be vigilant and to avoid large gatherings, while the British mission in Istanbul called on British businesses to tighten security after what it called a "suspected terrorist attack".
The most serious bombings of this kind in Turkey occurred in November 2003, when car bombs shattered two synagogues, killing 30 people and wounding 146. Authorities said the attack bore the hallmarks of al-Qaeda.
Part of the HSBC Bank headquarters was destroyed and the British consulate was damaged in two more explosions that killed a further 32 people a week later.