The blast happened at about 16:20 local time (13:20 GMT) on a shopping street in the Taksim Square area, the Turkish city's governor Ali Yerlikaya said.
Vice-President Fuat Oktay said the blast was thought to be a terrorist attack carried out by a woman.
President Recep Tayyip Erdogan said the perpetrators would be punished.
Speaking at a news conference in Istanbul, he condemned what he called the "vile attack" and said "the smell of terror" was in the air.
BBC correspondent Orla Guerin, who is in the area, said there was a heavy police presence around Istiklal Street, which had been cordoned off. Helicopters were circling overhead as ambulances went back and forth.
Many shopkeepers standing in their doorways on the normally bustling street looked stunned, she said, adding that the incident will have come as a shock to many in the city.
A woman who was in an internet cafe on Istiklal Street when the blast took place said there was a scene of "frenzy" following the explosion.
"I saw wounded people rolling around, there was a woman carrying her dog," she told the BBC.
"People were running in panic... There was black smoke. The noise was so strong, almost deafening," another eyewitness, Cemal Denizci, told AFP.
The street - one of the city's main arteries which is usually packed with shoppers - was previously targeted by a suicide bomber in 2016.
A bomb rocked a major pedestrian avenue in the heart of Istanbul on Sunday, killing six people, wounding several dozen and sending people fleeing the fiery explosion.
Emergency vehicles rushed to the scene on Istiklal Avenue, a popular thoroughfare lined with shops and restaurants that leads to the iconic Taksim Square. In one video posted online, a loud bang could be heard and a flash seen as pedestrians turned and ran away.
Turkish President Recep Tayyip Erdogan called the blast a “treacherous attack” and said its perpetrators would be punished.
He did not say who was behind the attack but said it had the “smell of terror” without offering details and also adding that was not certain yet. The president said investigations were ongoing by the police and the governor’s office, including reviewing footage of the area.
Erdogan said six people were killed. Vice President Fuat Oktay later updated the wounded toll to 81, with two in serious condition, and also said it appeared to be a terrorist attack.
Numerous foreign governments offered their condolences, including neighboring Greece with which relations are tense. Prime Minister Kyriakos Mitsotakis said he was “shocked and saddened by the news of the heinous attack.”
Turkey was hit by a string of bombings between 2015 and 2017 that left more than 500 civilians and security personnel dead. Some of the attacks were perpetrated by the Islamic State group, while others were executed by Kurdish militants who have led a decadeslong insurgency against the Turkish state for increased autonomy or independence.
Turkey has been fighting the militants — known as the PKK and considered a terrorist organization by Turkey, the United States and the European Union — in the country’s southeast for years.
Following the string of attacks, Turkey launched cross-border military operations into Syria and northern Iraq against Kurdish militants, while also cracking down on Kurdish politicians, journalists and activists at home through broad terror laws that critics say are a way to silence dissent.
Turkey’s media watchdog imposed temporary restrictions on reporting on Sunday’s explosion — a move that bans the use of close-up videos and photos of the blast and its aftermath. The Supreme Council of Radio and Television has imposed similar bans in the past, following attacks and accidents.
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