The explosion at the tail-end of evening rush-hour took place inside the Duroy Hotel in Beirut's Raouche district, a well-heeled neighborhood that borders the Mediterranean Sea.
Lebanese troops sealed off the area around the hotel and armed gunmen fanned out on the street to secure the location.
The bombing is the latest in a string of attacks and security scares in Lebanon over the past week that have sparked fears of renewed violence in a country that has been deeply affected by the civil war in neighboring Syria.
"Three general security officers were wounded. An operation is underway at the hotel. Every room is being searched to see if there are more explosives."
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A general security official said the raid was part of ongoing efforts to pursue suspected militants in Lebanon. He spoke on condition of anonymity because he was not authorized to brief journalists.
Moahamed Obeid, who works as a waiter at the hotel restaurant, said two SUVs carrying security agents arrived at the hotel just after a party began at 7:30 local time.
He said one employee at the hotel was wounded. Damage appeared to be confined to the third and fourth floors of the hotel. The explosion started a fire on the third floor, and thick black smoke billowed above the hotel as fire engines struggled to contain the blaze.
A string of security incidents over the past week has rattled Lebanon, and Beirut in particular, after what had been a calm and stable stretch of several months.
The bombing killed one person and wounded 20.
An al-Qaeda-linked group, the Abdullah Azzam Brigades, has warned that such attacks will continue as long as Hezbollah takes part in Syria's civil war alongside President Bashar Assad's military.