The Taliban claimed responsibility for the attack - the second against the Indian Embassy in the past two years - and specified that the Indians were the target.
In New Delhi, India's Foreign Secretary Nirupama Rao said the driver of the sport utility vehicle "came up to the outer perimeter wall of the embassy in a car loaded with explosives." Three Indian paramilitary guards were wounded by shrapnel, Rao said.
Rao did not say who the Indians believed was responsible for the attack, which occurred about 8:30 a.m. along a commercial street that is also home to the Interior Ministry.
However, the Afghan Foreign Ministry said the Thursday attack "was planned and implemented from outside of Afghan borders" by the same groups responsible for the July 2008 suicide bombing at the Indian Embassy that killed more than 60 people.
The ministry statement made no mention of Pakistan. However, the Afghan government blamed Pakistan's Inter-Services Intelligence for the 2008 bombing at the Indian Embassy as well as involvement in a string of attacks in the country.
U.S. officials suspected the 2008 embassy bombing and other high profile attacks were carried out by followers of Jalaluddin Haqqani, a longtime Afghan militant leader whose forces are battling U.S. forces in eastern Afghanistan from sanctuaries in the border area of Pakistan. At U.S. urging, the Pakistani military says it's planning an offensive against extremists in the border area.
In Islamabad, Pakistan's Foreign Ministry spokesman, Abdul Basit, condemned Thursday's bombing.
"Whenever terrorist activity occurs it should strengthen our resolve to eradicate and eliminate this menace," he said. Basit called allegations of a Pakistani role in the Kabul bombing "preposterous."
The Taliban did not say why it targeted the Indian Embassy. India and Pakistan, archrivals since the 1947 partition of the Indian subcontinent, are competing for influence in Afghanistan among rival ethnic groups. India maintains close ties with the Tajik community, and Pakistan with the Pashtuns, who form the majority of the Taliban.
Thursday's blast was the deadliest attack in Kabul since Sept. 17, when a suicide bomber killed 16 people, including six Italian soldiers and 10 Afghan civilians, on a road in the center of the capital.
The Interior Ministry said 15 civilians and two Afghan police officers were killed in Thursday's blast. At least 76 people were wounded, the ministry said. President Hamid Karzai, the U.S. Embassy and the United Nations mission all condemned the attack.
After months of relative calm, the Afghan capital has been shaken recently by an increasing number of suicide attacks and roadside bombings that began in the run-up to the country's disputed Aug. 20 election. The attacks usually target international military forces or government installations, but Afghan businesses and civilians are also often killed or injured.
Police sealed off the area after the blast.
The Indian news channel CNN-IBN cited Jayant Prasad, India's ambassador in Kabul, as saying the blast caused "extensive damage to the chancery." He said the bomb was so powerful that it blew off some of the embassy's doors and windows.
The explosion also damaged a line of shops between the embassy and the Interior Ministry, shattering glass and rattling buildings more than a mile (kilometer) away. A huge brown plume of smoke was visible in the air as ambulances raced to the scene and carried away the wounded.
A European police officer assigned as an adviser to the Interior Ministry and an Afghan interpreter were slightly wounded by flying glass, training spokesman Andrea Angeli said.
A 21-year-old Afghan man, who gave his name only as Najibullah, said he had just opened his shop when the explosion went off, knocking him unconscious. When he awoke, he said, he couldn't see anything because of dust and debris.
"Dust was everywhere. People were shouting," Najibullah said. "You couldn't see their faces because there was so much dust." His white clothes were covered in blood after helping load four injured onto ambulances.
AP Television News footage showed local residents and soldiers pulling a charred, severed leg out of a destroyed vehicle. Others carried an apparently lifeless body on a stretcher to an ambulance.
On another stretcher, a man lay face down, one arm hanging downward, his left leg covered in blood.
Two United Nations vehicles were near the blast and one was badly damaged, spokesman Dan McNorton confirmed. Both vehicles had only a driver inside, and neither was wounded. The U.N. typically uses armored vehicles in Kabul that are designed to withstand such attacks.
One injured man said the force of the explosion threw him into the air. Mohammad Arif said he was leaving the embassy when the blast tossed him against a concrete barrier. The left side of his head was bleeding as he spoke.
Separately Thursday, French Defense Minister Herve Morin announced the death of a French marine killed in an IED attack on Sept. 4.
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Associated Press Writers Todd Pitman and Heidi Vogt in Kabul, Nirmala George in New Delhi and Nahal Toosi in Islamabad contributed to this report.
