Mayor José Luis Martínez Almeida told reporters that an initial assessment suggested a gas leak had caused the explosion, which destroyed the residential building and left other structures with mild damages.
Rescue workers and firefighters are searching for other possible survivors.
The explosion took place shortly before 15:00 local time (14:00 GMT) while gas workers were repairing a boiler at the back of the building in the central Puerta de Toledo area of Madrid.
An 85-year-old woman passer-by and two men have been killed while a third man who had been working on the boiler is missing, according to Spanish media reports. (ILKHA)