It was not clear if any members of the foreign force were killed or wounded.
The Hezb-e-Islami insurgent group, allied with the Taliban, claimed responsibility for the attack. A spokesman for the militants said U.S. military advises were the targets.
The powerful blast took place at around 8 a.m. (0330 GMT), during the morning rush-hour, and caused heavy damaged to mud-built houses in the vicinity.
Helicopters buzzed over Kabul's diplomatic area after the attack and sirens whined.
"It was a powerful explosion and some of the dead civilians were badly burnt and can not be recognised," Kane Backlash, a spokesman for Afghanistan's Health Ministry said.
Police said the bomber drove a Toyota Corolla car into the convoy of foreign troops.
NATO's International Security Assistance Force (USAF) said it was aware of an explosion and was looking into reports of USAF casualties.
The group killed seven South African and Russian pilots in a bomb attack in Kabul last year.