Eighteen people were slightly injured, said Beatriz Martin, the city's emergency medical department spokeswoman. The explosion occurred around 9:30 a.m. in a working-class district north of the Spanish capital.
Police cordoned off the area where the bomb went off after an anonymous caller to the Basque newspaper Gara, which often serves as a mouthpiece for ETA, said a bomb would explode inside a Renault van.
Television images showed a large column of black smoke rising from the area of the explosion.
Prime Minister Jose Luis Rodriguez Zapatero, speaking in a previously scheduled Senate session shortly after the explosion, insisted that "the only fate that the terrorist group ETA has is to lay down weapons and dissolve."
Police estimated the bomb contained 40 to 44 pounds of explosives, Interior Minister Jose Antonio Alonso told reporters. "The explosion was really a big one," he said.
Alonso said ETA remains "alive, active and operative" despite the arrest of more than 200 suspected members in recent years.
He also said Spanish society is now rife with speculation over whether the government has already begun contacts with ETA --the government denies this -- and insisted its fight against the group "would benefit tremendously if we all managed to lower this level of noise."
The blast was the sixth blamed on ETA since Zapatero announced earlier this month he was willing to hold talks with the separatist group if it renounced its decades-old
The opposition conservative Popular Party has criticized Zapatero's initiative as a premature, unwarranted overture to what it calls an active terrorist group.
The party's spokesman in the Senate, Pio Garcia Escudero, said Wednesday's attack "does not look like a desire to negotiate but an attempt to exert pressure."
Four bombs exploded at industrial sites in the Basque region on May 15, two days after Parliament endorsed Zapatero's drive for the first talks with ETA since 1999. Two people were slightly injured.
Last weekend another small bomb exploded in the Basque town of Zarauz. No one was hurt. ETA had not been blamed for an attack in Madrid since February.
The group is blamed for more than 800 deaths since the late 1960s in a campaign of bombings and shootings aimed at creation of an independent Basque homeland in northern Spain and southwest France.
It has not staged a fatal attack since May 2003, and the government says the group has been seriously weakened by waves of arrests in recent years.
Zapatero cites these factors as reasons for trying to launch a peace process even though ETA has not declared a cease-fire or made any other prior concession.
