The three killed were employees of Tesla Motors Inc., said Elon Musk, chief executive of the electric car manufacturer.
There were no reports of injury on the ground, and fires caused by the crash were soon extinguished.
The Cessna 310 crashed around 7:55 a.m. shortly after takeoff from the Palo Alto Airport and was bound for Hawthorne Municipal Airport in Southern California, according to the Federal Aviation Administration. The crash site is one mile northwest of the airport, near Tesla's headquarters in San Carlos.
The company would not release the employees' identities pending notification of families.
"Tesla is a small, tightly knit company, and this is a tragic day for us," Musk said in a statement.
The plane is registered to Air Unique Inc., and state records show that the company is owned by Doug Bourn of Santa Clara. A Tesla spokesman has said Bourn is a senior electrical engineer at the company.
Menlo Park Fire Chief Harold Schapelhouman said the plane either struck a 100-foot electrical tower or clipped its power transmission lines and broke apart, sending debris raining down on the working-class Silicon Valley neighborhood.
A wing fell onto one house, where the children's day care operated, and the rest of the plane struck the front retaining wall of another house down the street before landing onto two vehicles on the street, Schapelhouman said. Debris also struck two neighboring houses, he said.
The occupants of the homes have been accounted for, although authorities can't be sure of the fatality count until crews begin clearing the wreckage, Schapelhouman said.
"Either by luck or the skill of the pilot, the plane hit the street and not the homes on either side," he added. "That saved people in this community."
Kate McClellan, 57, said she was walking her dog when she saw a plane descend from the foggy sky and strike the tower, causing power lines to swing wildly in the air.
"It burst into flames, and then it kept flying for bit before it hit some houses and exploded," McClellan said.
Pamela Houston, an employee of the day care in the house struck by the wing, said she was feeding an infant when she heard a loud boom that she initially thought was an earthquake until she "saw a big ball of fire hit the side of the house."
Houston said she screamed to the others in the house - the owner, the owner's husband and their three children - and the group safely escaped before the home went up in flames.
"There are not even words to describe what it felt like," she said. "I am very thankful to God that he allowed us to get out."
The city of Palo Alto, which provides power through a municipal utility agency, said most of the city and surrounding area had lost power due to Wednesday's plane crash. Lucile Packard Children's Hospital and Stanford Hospital both were operating on backup generators and canceled elective surgeries for the day, according to hospitals spokesman Robert Dicks.
"We have multiple crews on scene investigating," said Joe Molica, a spokesman for Pacific Gas & Electric, which owns the transmission lines used by the city. "The crash appears to have affected three transmission lines that serve the city of Palo Alto's municipal utility."
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Thanawala reported from San Francisco. Associated Press writers Jason Dearen and Marcus Wohlsen in San Francisco also contributed to this report.
