Police and security forces immediately sealed off the area around the Maka al Mukarama hotel, situated along a busy Mogadishu street and popular with politicians and the elite.
"Some 11 people were killed and a dozen more injured," police official Anshur Nur told AFP close to the scene of the blast.
"I could see several burning cars, dead and injured people on the ground," he said.
Mogadishu is frequently targetted with suicide and car bombings carried out by Al-Qaeda-linked Shebab rebels, who are fighting to overthrow the country's internationally-backed government.
The powerful blast, which was heard across the city, occurred at the gates of the hotel, one of the most expensive in Mogadishu and run by Somalis from the diaspora.
The hotel has a restaurant and a coffee shop known to be popular with the local elite, notably government officials and businessmen, and local reports said the hotel was hosting several VIPs at the time of the blast.
Somalia's Prime Minister Abdi Farah Shirdon blamed "enemies of peace" for the attack.
"These cowardly acts of terrorism will not derail the progress made in Mogadishu and across Somalia. We -- the Somali people and the Somali government -- will stand shoulder to shoulder to defeat these killers. These terrorists will not defeat us but make us stronger."
The attack comes as the African Union force in Somalia (AMISOM) is asking the UN Security Council to boost its numbers by over a quarter to 22,000 as part of efforts to step up offensive operations against the Shebab.
Shebab said it carried out the attack on the Westgate mall in retaliation for Kenya's military intervention in Somalia.
Last month officials said Shebab's top suicide bomb-maker was killed in a US army drone strike.
In early October US Navy SEALS struck the Shebab-held southern port of Barawe, but failed to kill or capture the top militant being targetted.
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