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The bomb was placed in a trash can at a bus stop outside the Tatilya fairground, in Beylikduzu, a suburb on the European side of the city, Gov. Muammer Guler said.
A 36-year-old man died in hospital from his injuries, Istanbul's Ozel Avcilar Hospital said.
Guler said police believed the bomb was made of remote-controlled plastic explosives, favored by autonomy-seeking Kurdish rebels, who have carried out similar attacks in the city in the past. Militant leftist and Islamic groups are also active in the city.
Turkey's Kurdish-dominated southeast has seen violent street protests for about a week, following allegations that Turkish security forces may have been behind a November nine bombing targetting a convicted Kurdish guerrilla in the town of Semdinli. Yesterday, the protests also spread to Istanbul.
In Gazi Mahallesi, a predominantly Kurdish neighborhood of Istanbul, around 50 people wearing masks piled up market stands and set them on fire. The group was scattered by police teams arriving on the scene.
The detention of three members of the security services after the November 9 bombing of a bookshop in the town of Semdinli in Turkey's troubled, mainly Kurdish southeast, reawakened suspicions that the "deep state" is still alive and well.
When prosecutors then freed two of the men, and Yasar Buyukanit, head of Turkey's land forces, described one of them as "a good soldier", the suspicions deepened.
"There are two states (in Turkey)," former President Suleyman Demirel told NTV television, commenting on the bombing and making clear he believed Turkey had not changed very much.
"There is the state and there is the deep state ... When a small difficulty occurs, the civilian state steps back and the deep state becomes the generator (of decisions)."