The explosion happened on Circle line train number 204 travelling east from Liverpool Street station to Aldgate.
Police said that the device was placed on the floor of the third carriage.
Passenger Simon Tonkyn told of an "enormous bang and a lot of smoke". He added: "A group of us got fire extinguishers and were able to smash through the carriage door."
Another man, Terry O'Shea, said passengers were led down the track past the carriage where the explosion was. "We could see the roof was torn off it, and there were bodies on the track."
Passengers were led out of the train to safety at Liverpool Street station and Aldgate.
Police confirmed that seven people died in the blast. More than 100 were wounded, at least 10 seriously.