"The toll from a car bomb explosion that detonated after Friday prayers in Suq Wadi Barada has risen to 40, including seven children and a woman," said the Observatory.
"The number of dead is likely to rise because there are dozens of wounded, most of them in critical condition," it added.
State news agency SANA had earlier reported the blast, blaming "terrorists", the term the Assad regime uses for forces fighting to oust it.
SANA said "the car exploded while the terrorists were packing it with explosives".
The opposition National Coalition meanwhile blamed the Assad regime for the "massacre" caused by what it said were two car bombs placed outside the Osama Bin Zeid mosque in Suq Wadi Barada.
"Bashar al-Assad's gangs detonated two car bombs at midday... that were planted in front of the Osama Bin Zeid mosque in Suq Wadi Barada," the Coalition said in a statement.
"The regime's constant commission of massacres makes it the duty of countries of the free world, the friends of the Syrian people, as well as international human rights and humanitarian organisations to fulfil their responsibilities towards civilians," it added.
They must "protect the lives of Syrians and uphold their rights".
Car bombings have plagued Syria in recent months, killing scores across the country.
Syrian state TV meanwhile reported that Abu Mohammed al-Jawlani, leader of the Al-Nusra Front, a powerful jihadist rebel group linked to Al-Qaeda, was killed in northwestern Latakia province, but the Front later said he was in good health.
In other violence an army ambush east of Damascus killed some 24 rebels, the Observatory said, as SANA put the toll at 40.
The outskirts of the capital have seen fierce fighting in recent days as Assad's troops try to tighten the noose around rebel areas.
The army has closed in on Eastern Ghouta, a ring of suburbs besieged for months, which was targeted in an August chemical attack that killed hundreds of people and almost led to punitive US strikes.
UN and US officials have expressed concern about Eastern Ghouta and other besieged Damascus suburbs, following reports of severe food shortages and rising malnutrition.
UN describes 'grim and gruesome reality'
UN humanitarian chief Valerie Amos on Friday called on the Security Council to put "sustained pressure" on the Syrian regime to allow access to some 2.5 million civilians trapped by the conflict.
"Words, despite their ability to shock, cannot really paint a picture of the grim and gruesome reality of Syria today," Amos told the 15-nation council.
The Observatory described a similarly dire situation in the central city of Homs, where it said some 3,000 civilians were trapped in an area sealed off by regime forces for more than a year.
"Three thousands civilians, among them 500 aged over 70, are living exclusively off the little food that had been stored in the besieged districts of Homs," said Observatory director Rami Abdel Rahman.
Further north, in the Sfeirah district near Aleppo, some 130,000 Syrians have fled non-stop heavy bombing in a "massive exodus" this month, according to Doctors Without Borders.
Some 115,000 people have been killed since the start of Syria's uprising in March 2011 and millions have been displaced.
A UN-commissioned report released Friday said more than half of Syria's population is now living in poverty and warned that the economic devastation wrought by the war could last for years.
In the latest sign of Syria's growing misery, UN agencies said they were racing to vaccinate children against a host of diseases amid fears of a polio outbreak, which would be the country's first since 1999.
The mushrooming humanitarian crisis, and the initial success in implementing a US-Russian accord to dismantle Syria's chemical arsenal, have spurred renewed efforts to convene peace talks.
But despite pressure from its Western and Arab backers, the fractured Syrian opposition has yet to decide whether to attend the so-called Geneva 2 conference proposed for next month.
The opposition has insisted that Assad step down as part of any political settlement, which Damascus says is off the table.