Bars and restaurants in the area, London's gay centre, were packed with people celebrating the start of the bank holiday weekend.
The blast comes after last Saturday's device in London's Brick Lane and the previous week's nail bomb attack on Brixton market, which injured 39 people.
Police suspect an extreme right-wing group may be behind the attacks.
Last night's explosion happened inside the Admiral Duncan pub at the corner of Old Compton Street and Dean Street. The area was packed with tourists, office workers and early-evening revellers.
One witness said that a plume of smoke came out of the pub, blowing one man across the road.
The London Ambulance was asked to send 17 crews to the scene. Two men were treated on the street by passers-by, and a third was carried out from the pub with "serious injuries".
Robert Chung, a waiter at a Chinese restaurant in Old Compton Street, said: "The bomb was in a gay bar next door. There are people lying out on the pavement injured. Police are keeping us inside.
"I heard it go off at around 6.30. There was a very loud explosion."
Johann Steinecker, of the patisserie Maison Bertaux in nearby Greek Street, said: "It sounded like a gas explosion. All we can see is the smoke. There are three big fire engines and an ambulance down there. I can't tell where it happened.
"It was just starting to get busy with a lot of people in the street. Friday night is one of the busiest nights down here."
Other witnesses spoke of many injured on the ground with blood flowing from head wounds. Some appeared to be seriously injured. Others were walking wounded.
John Laycock, of the nearby Soho House restaurant, said he heard what sounded like a loud crack of thunder. Guests at his restaurant said they feared it was a nail-bomb attack.
Andy Clements, 34, said: "It was a packed street with tourists and people out for a night when there was an enormous explosion. People were hit by flying glass and there was a lot of blood. Other people going to meet friends in the pub were screaming."Reuse content