The blast comes amid spiralling tension in Lebanon over the civil war raging in neighbouring Syria, where Hezbollah fighters have joined President Bashar al-Assad's forces in facing down a revolt by mainly Sunni rebels.
The attack took place in a zone monitored closely by Hezbollah.
It is the most serious incident in the movement's Beirut stronghold since the start of the Syria war more than two years ago.
"A car bomb exploded near a commercial cooperative called the Islamic Cooperation Centre in Bir al-Abed," which lies in the heart of Hezbollah's Beirut stronghold, the military source said.
The densely populated Bir al-Abed neighbourhood is home mainly to Shiite Muslims.
Several broadcasters, among them Hezbollah's Al-Manar, showed firefighters battling several blazes while large clouds of black smoke billowed into the sky.
A witness told AFP the explosion was "huge".
"Everyone started panicking. Everyone was running left and right" after the blast, said Carole Mansour, who owns a shoe shop near the affected area.
"The smoke was so (thick)," Mansour told AFP, adding that Hezbollah members dressed in civilian clothing were quick to deploy around the site of the blast.
"I can't believe someone would do this on the first day of Ramadan," said Mansour, referring to the Muslim holy fasting month.
Some Shiites started their fasting today, although other Shiites and Sunnis will begin fasting either tomorrow or Thursday.
Lebanese politicians from across the spectrum quickly condemned the blast, including President Michel Sleiman.
Officially neutral in Syria's conflict, Lebanon is deeply divided into pro and anti-Assad camps.
Hezbollah and its allies back Assad, who adheres to the Alawite offshoot of Shiite Islam, while the Sunni-led opposition supports rebels seeking his ouster.
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