Dramatic video footage and pictures posted on Twitter showed thick black smoke billowing above Kandivali slum after more than a dozen liquefied petroleum gas (LPG) cylinders exploded in quick succession.
"About 1,000 homes have been destroyed," Dhananjay Kulkarni, a deputy commissioner with the Mumbai police, told AFP.
"There's been one death. The body was completely charred so we can't identify the gender. The death toll may rise," he said.
Prabhat Rahangdale, chief fire officer of the Mumbai fire brigade, said between "15 to 20 LPG cylinder blasts occurred" in the east of Kandivali, an area in the north of the teeming city.
"Two females sustained burn injuries of 40 and 42 per cent and four males sustained minor injuries," he added, saying they had been taken to hospital for treatment.
Rahangdale said the fire brigade had sent 16 fire engines to the area after it received a call alerting them to the blaze shortly after 12:30 pm (0700 GMT).
Monday's accident was the latest deadly fire-related disaster to have occurred in Mumbai this year. In June, a fire in a high-rise apartment block killed seven people after they became trapped in a lift on the upper floors.
A month earlier four senior officers from a Mumbai fire brigade died in a blaze at another building.
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