No injuries were reported.
The blast happened amid efforts by the Australian diplomatic mission in Iraq to mediate between influential Shiite cleric Muqtada al-Sadr and an Iran-backed faction of rival Shiite parties, according to the security officials, to end one of Iraq's worst political crises in recent years.
Foreign Ministry spokesman Ahmad al-Sahaf condemned the attack and said Iraq was committed to protecting all diplomatic missions in the country.
Caretaker Prime Minister Mustafa al-Kadhimi has been unsuccessful in trying to bring the quarrelling groups to a settlement.
Al-Sadr's party declined to attend a meeting al-Kadhimi held last week.
Despite the explosion, the Australian convoy was able to enter the Green Zone.
The followers of al-Sadr and his political rivals, a coalition of Shiite groups called the Coordination Framework, have been at odds since after last year's parliamentary elections.
Al-Sadr won the largest share of seats in the October vote but failed to form a majority government, leading to what has become one of the worst political crises in Iraq in recent years.
His supporters in late July stormed the parliament and have held frequent protests there.
The firebrand cleric's supporters have regularly protested, demanding the dissolution of parliament and early elections.
On Tuesday, al-Sadr's supporters pitched tents and protested outside the Supreme Judicial Council, accusing it of being politicised in favour of their Iran-aligned allies.
