Original reports put the death toll at over 27 people, but U.S. military officials said Thursday that seven people were dead and 27 wounded. No reason was given for the revised numbers.
Pictures from the scene Wednesday showed flames and heavy smoke billowing from the five-story Jabal Lebanon Hotel, igniting trees and nearby buildings and cars.
Rescuers pulled bodies from the rubble and searched for other victims.
Americans, Britons, Egyptians and other foreigners were staying at the hotel, said Baghdad resident Faleh Kalhan, according to the Associated Press.
"I heard the explosion and I ran down the street, and saw many, many people killed. There were children dead," said Raad Abdul Karim, Reuters reported. He said the neighborhood was populated by Shiites, Sunnis and Kurds.
The hotel was considered a soft target, with no concrete barriers or other security measures in place. It is located near the Palestine Hotel, where many foreign contractors and journalists are based.
The blast, which created a 20-foot-wide and 10-foot-deep crater in the road outside the Jabal Lebanon Hotel, was caused by a 1,000-pound bomb and fit the profile of "terrorist organisations we have been combating in the last year -- either Ansar al Islam or the [suspected al-Qaida member Abu] Zarqawi people," U.S. Col. Ralph Baker told CNN.
The Bush administration offered prayers for the victims but said the attack would not change U.S. policy.
"Democracy is taking root in Iraq and there is no turning back," said White House spokesman Scott McClellan. "This is a time of testing, but the terrorists will not prevail."
Earlier in the day, the Iraqi Governing Council asked the United Nations for help putting together a new government, council spokesman Hamid al-Kafaai told the AP.
Council president Mohammed Bahr al-Ulloum, a Shiite cleric, sent a letter requesting assistance, including technical help with general elections due by the end of January 2005.
The United States has urged a U.N. role in the U.S.-backed political process for Iraq, and coalition spokesman Dan Senor welcomed the news of the invitation, according to the AP.
Also Wednesday, U.S. and Iraqi military forces launched an operation dubbed "Iron Promise" to find insurgents and seize illegal weapons, raiding a suspected arms market in Baghdad.
The raid on the suspected arms market came during a week of ambushes on foreigners in which two Europeans and four American missionaries working on water projects were killed.
-- Compiled from wire reports and other media sources