The foreign ministry official, speaking on condition of anonymity, said "protestors threw a crude cocktail bomb near the gate of the hotel where the Indian president is staying in Dhaka".
The official said nobody was injured and the president would continue his three-day state visit, which is set to finish on Tuesday.
A statement from the president's office said nobody in the delegation had heard the "minor explosion".
"Bursting of such cocktails are common in Bangladesh during hartals (shut-downs) and cannot be described as a bomb," said the statement.
Local policeman Apurba Hasan told AFP that officers had heard "a loud noise about 200 metres (650 feet) outside the hotel".
The Indian president is on a three-day state visit to Bangladesh, which has coincided with the worst violence in the country since independence in 1971.
The country's main Islamic party has enforced a two-day strike over the conviction of three of its top leaders for war crimes.
Sixty-four people have died since the vice-president of Jamaat-e-Islami was sentenced to death last Thursday.
In an apparent fall-out of the domestic political standoff, opposition leader Khaleda Zia cancelled her meeting with Mukherjee that was scheduled for Monday.
Hotel Sonargaon denies blast
The management of the posh hotel has denied the reports of any explosion near the premises. According to them, the president was not in the building when the blast reportedly took place.
Talking to India Today, Sonargaon public relations manager Salman Kabir said, "There is no blast or explosion outside the hotel. The President of India is not in the hotel right now."
COMMENTS (3)
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@Shameema: a guardian report cant justify your claim while many other independent sources confirmed the number of death.
http://www.guardian.co.uk/world/2011/may/24/mujib-confusion-on-bangladeshi-deaths
Dear Raj: we wish you and Shonar Bangla all the best but please try and learn the truth first. Don't believe all the lies you have been told about us.
In another 10 - 20 years, Bangladesh shall lead the muslim world, they shall become an inspiration to others.
Amar Sonar Bongla Ami Tomai Balobashi !!!!!!!!!!!!