There was a high probability ISIS terrorists were behind the blast near the Blue Mosque and Hagia Sophia, major tourist sites in the centre of one of the world's most visited cities, two senior Turkish security officials told Reuters.
Several bodies lay on the ground in the Sultanahmet square in the immediate aftermath of the blast. A police officer and witness at the scene also reported seeing several body parts.
An official at the German foreign ministry said it was urgently working to find out whether German citizens were among the wounded. A tour company official told Reuters a German group was in the area at the time but said there was no immediate information on whether any of them had been injured.
Norway's foreign ministry said one Norwegian man was injured and was being treated in hospital. The Dogan news agency said six German citizens and one Peruvian were also wounded.
"I condemn the terror incident in Istanbul assessed to be an attack by a suicide bomber with Syrian origin. Unfortunately we have 10 dead including foreigners and Turkish nationals," Erdogan told a lunch for Turkish ambassadors in Ankara, in a speech broadcast live on television.
"This incident has once again showed that as a nation we should act as one heart, one body in the fight against terror. Turkey's determined and principled stance in the fight against terrorism will continue to the end," he said.
Turkey, a NATO member and candidate for accession to the European Union, is part of a US-led coalition against ISIS fighters who have seized territory in neighbouring Syria and Iraq.
There was no immediate claim of responsibility but Islamist, leftist and Kurdish terrorists, who are battling Ankara in southeast Turkey, have all carried out attacks in the past.
The Istanbul governor's office said the authorities were investigating the type of explosive used and who might have been responsible. It said ten people were killed and 15 wounded but gave no further details.
"We heard a loud sound and I looked at the sky to see if it was raining because I thought it was thunder but the sky was clear," said Kuwaiti tourist Farah Zamani, 24, who was shopping at one of the covered bazaars with her father and sister.
A second police officer at the scene said the square was not densely packed at the time of the blast, but that small groups of tourists were wandering around.
"It was unimaginable," he said, describing an amateur video he had seen of the immediate aftermath, with six or seven bodies lying on the ground and other people seriously wounded.
Ambulances ferried away the wounded and police cordoned off streets, fearing a second attack. The sound of the call to prayer rang out from the Blue Mosque as forensic police officers worked at the scene.
"The explosion was very loud. We shook a lot. We ran out and saw body parts," one woman who works at a nearby antiques store told Reuters, declining to give her name.
The dull thud of the blast was heard in districts of Istanbul several kilometres away, residents said. Tourist sites including the Hagia Sophia and the nearby Basilica Cistern were closed on the governor's orders, officials said.
Prime Minister Ahmet Davutoglu held an emergency meeting in Ankara with the interior minister and security chiefs. A senior official said "terrorist links" were suspected in the attack, but declined to comment further.
Just over a year ago, a female suicide bomber blew herself up at a police station for tourists off the same square, killing one officer and wounding another. That attack was initially claimed by a far-left group, the DHKP-C, but officials later said it had been carried out by a woman with suspected Islamist terrorists links.
"Ambulances started rushing in and I knew it was a bomb right away because the same thing happened here last year," said Ali Ibrahim Peltek, 40, who operates a kiosk selling snacks and drinks on the square.
"This is not good for Turkey but everyone was expecting a terrorist attack," he said.
TURKEY A TARGET
Turkey has become a target for ISIS, with two bombings last year blamed on the radical Sunni Muslim group, in the town of Suruc near the Syrian border and in the capital Ankara, the latter killing more than 100 people.
Violence has also escalated in the mainly Kurdish southeast since a two-year ceasefire collapsed in July between the state and the Kurdistan Workers Party (PKK) militant group, which has been fighting for three decades for Kurdish autonomy.
The PKK has however generally avoided attacking civilian targets in urban centres outside the southeast in recent years.
Turkey also sees a threat from the PYD and YPG, Kurdish groups in Syria which are fighting ISIS and with US backing, but which Ankara says have close links to the PKK.
"For us, there is no difference between the PKK, PYD, YPG, DHKP-C ... or whatever their abbreviation may be. One terrorist organisation is no different than the other," Erdogan said, vowing that Turkey's military campaign against Kurdish militants in the southeast would continue.
"The first target of all terrorist organisations that operate in this region is Turkey, because Turkey fights all of them without discrimination and with the same determination."
Davutoglu's office imposed a broadcasting ban on the blast, invoking a law which allows for such steps when there is the potential for serious harm to national security or public order.