"Five US soldiers were killed today when their dismounted patrol was struck by a suicide bomber. Three US soldiers and an Iraqi interpreter were wounded as well," military spokesman Lieutenant Michael Street said.
A separate US military statement said one of the five soldiers died of wounds received from the attack that occurred at around 3:00 pm (1200 GMT).
The latest fatalities bring the US military's death toll since the March 2003 invasion to 3,980, according to an AFP tally based on independent website www.icasualties.org.
An Iraqi security official said two civilians were also killed in the attack and 15 others were wounded. He said around six shops in the vicinity were also damaged.
An Iraqi soldier at the scene told how he and his comrades had raced to the area of the blast to help.
"We rushed to the spot and saw six casualties ... five Americans were killed and one translator was wounded," said the exhausted soldier, his trousers drenched in blood after helping carry the victims.
He spoke on condition of anonymity as he drank tea at a nearby stall to calm his nerves.
"A terrorist wearing an explosive vest blew himself against a dismounted US patrol," Iraqi army spokesman Major General Qasim Ata told AFP. "The attack left six Iraqi civilians wounded, and caused some casualties among the American troops."
Describing the attack, an Iraqi policemen at the site told AFP that a convoy of five or six US military vehicles stopped in the neighbourhood because some of the soldiers "wanted to shop."
About 10 minutes later "there was an explosion," he said, adding that he believed six soldiers were killed.
"After that the American soldiers shot in the air but nobody was wounded. They later took the bodies in cars."
US troops cordoned off the entire neighbourhood, the AFP reporter said.
Earlier a medic at Baghdad's Yarmukh hospital said the attack was against private security guards.
A local resident from the Sunni stronghold of Mansur where the attack took place expressed his joy over the attack which he said killed six soldiers.
"Today is a good day. Six American dogs were killed," he said on condition of anonymity.
Some witnesses said the bomber was dressed in a suit and tie.
US military Colonel Allen Batschelet in the statement said the attack would not deter the military from working jointly with Iraqi forces "to protect the Iraqi people against terrorists, extremists and criminals."
"Five soldiers paid the ultimate sacrifice on behalf of the Iraqi and American people. We are firm in our resolve to protect the people of Iraq and kill or capture those who would bring them harm."
The previous major attack against US troops was on January 9 when six US soldiers were killed when they entered a booby-trapped house in the restive province of Diyala, northeast of Baghdad.
In another attack, on February 9, four US soldiers were killed when their vehicle struck a roadside bomb while conducting a combat patrol northwest of Baghdad.
The latest attack comes just days after a twin attack in central Baghdad's commercial district of Karada slaughtered 68 people.
Last week the US military announced a reduction in troops on the back of what it claims to be a drop in violence across Iraq.
It said about 2,000 soldiers from the 82nd Airborne Division, deployed in last year's surge, would not be replaced once they leave the country, likely to be within the next few weeks.
The US military at present has 158,000 troops in Iraq.
Figures collected by AFP on March 1 from the interior, defence and health ministries showed that violence in Iraq surged in February after falling in each of the six months to January.
Some 721 people were killed in February, a 33 percent rise over January, when 541 people were killed. That was down from 1,856 last August.
The drop over six months was attributed to a "surge" of an extra 30,000 US troops sent to Iraq, the formation by Sunni leaders of anti-Qaeda fronts and a ceasesfire by Shiite cleric Moqtada al-Sadr's Mahdi Army militia