Most of the windows in the 20-floor highrise were blown out, and the bottom floor appeared to be gutted. Nearby offices were also heavily damaged and evacuated, including those housing some of Norway's leading newspapers and news agency NTB.
Meanwhile, Norway's oil ministry has been evacuated following an explosion close to the government's headquarters amid reports that the oil ministry is on fire and may have been the target of the attack.
Ingunn Andersen, a journalist with Norwegian public radio NRK, said from the scene: "I see that some windows of the VG [a popular Norwegian tabloid newspaper] building and the government headquarters have been broken."
"Some people covered with blood are lying in the street. There is glass everywhere. It is total chaos. The windows of the all the surrounding buildings have been blown out."
NATO member Norway has in the past been threatened by leaders of Al Qaeda for its involvement in Afghanistan.
Norway has been part of the International Security Assistance Force (ISAF) in Afghanistan from its foundation in late 2001. Television footage from the scene showed rubble and glass from shattered windows in the streets - smoke was around some buildings. The wreckage of at least one car was in street.
Al Jazeera reports the blast blew out the windows of the building which houses the Prime Minister's office.
The cause of the blast is unknown, but a tangled wreckage of a car was spotted outside one of the buildings. The damage appeared consistent with that from car bombs. Police and fire officials however declined to comment.
Photos posted on the NRK website showed shattered glass in front of the devastated facade of the VG building, and soldiers closing off the area and people surrounding someone apparently injured in the blast.
Last week, a Norwegian prosecutor filed terror charges against an Iraqi-born cleric for threatening Norwegian politicians with death if he's deported from the Nordic country.
The indictment centered on statements that Mullah Krekar -- the founder of the Kurdish Islamist group Ansar al-Islam made to various media, including American network NBC.
"Norway will pay a heavy price for my death," Krekar had said. "If, for example, Erna Solberg deports me and I die as a result, she will suffer the same fate."
A second theory that has been proposed behind Friday's attack is the cartoon crisis. In early 2006, a small Norwegian newspaper had angered many Muslims by reprinting Danish cartoons depicting the Prophet Muhammad.
Senior adviser Oivind Ostang told Norwegian TV2: "We can confirm that everybody who was working in the prime minister's office today are safe.
"The only thing I know is that there has been a fire or something approaching a fire in the R4-buildling which houses the oil- and energy office."
A second theory that has been proposed behind Friday's attack is the cartoon crisis.
In early 2006, a small Norwegian newspaper had angered many Muslims by reprinting Danish cartoons depicting the Prophet Muhammad.
Meanwhile, chaos prevails in Oslo.
The police depatment has asked people to nefrain from using cellphones, as the networks are at a breaking point.
Oistein Mjarum, head of communications at the Norwegian Red Cross, told the BBC the area hit by the blast would have been "very busy" on Friday afternoon.
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