No group immediately claimed responsibility for the attack, which comes as the Taliban step up their summer offensive despite a bitter power transition within the militant movement.
Women and children were among the casualties of the powerful blast that struck Shah Shaheed, a neighbourhood in east Kabul, but rattled homes across the city, damaging buildings and shattering windows.
The force of the explosion left an enormous crater in the road, around 10 metres deep, and reduced the front of nearby buildings to rubble.
Kabul police chief General Abdul Rahman Rahimi confirmed the number of dead and wounded, saying officials were searching for anyone trapped under the mangled concrete debris.
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"The killed and wounded include women and children, and labourers of a nearby marble stone company are among the victims. The attack was intended to cause mass murder," he said.
Health ministry spokesman Wahidullah Mayar said the number of wounded could run into the hundreds, with most suffering injuries from flying glass.
It was not clear whether the intended target was an Afghan National Army base close to Shah Shaheed, a largely middle- class civilian residential area with no major foreign presence, but Rahimi said no military casualties were reported.
The carnage comes a day after Taliban insurgents killed nine people in multiple attacks on police targets in southern and eastern Afghanistan.
The attacks highlight growing insecurity amid a faltering peace process with the Taliban as Afghan forces face their first summer fighting season without full NATO support.
The NATO mission in Afghanistan condemned the bombing as a "contemptible act of violence".