The explosion, in a City Council garbage truck, shook the George Street foyer of the hotel and ripped out ceiling and light fittings.
Police feared further bombs could be in the vicinity. Bomb disposal experts and the Police Rescue Squad were called to the scene.
The bomb exploded only a few feet from the hotel entrance.
About one hour earlier the visiting Asian and Pacific Heads of Government had returned from a harbour cruise as guests of the Prime Minister, Mr Fraser.
Seconds after the blast, security men rushed to guard the suites occupied by the visiting leaders.
Police said they were treating the explosion as a deliberate attempt to sabotage the conference.
One staff number said he was thrown backwards into the foyer from the top of the George Street escalators.
The hotel’s marble foyer was littered with debris from the truck and splashes of blood.
Commonwealth and State police and private security men threw a tight cordon around the hotel and sealed oft George Street between Market and Park Streets.
An anonymous caller telephoned the Herald only five minutes before details of the explosion came through, and said: «You’ll be interested in what the police are going to be doing down at the Hilton soon.»
Police said the caller also telephoned the duty office a short time before the explosion. They said he had a foreign accent.
Officials said the two dead were a policeman and the garbage disposal worker.
Windows in the Hilton Hotel and nearby shops were shattered by the blast and broken glass and other debris littered the roadway.
At least seven people injured by the force of the explosion and flying glass were taken to Sydney Hospital.
A nursing sister at the hospital’s casualty department said more were on their way by ambulance when this edition went to press.
Mr Fraser was asleep when the explosion occurred.
A Federal Government official said all the Commonwealth leaders and their aides and officials were safe.
Mr Fraser, who was in a suite near the top of the hotel, was awakened and told of the explosion by the Foreign Minister, Mr Peacock.
He immediately went down to the scene of the blast, then called an immediate security conference, which was expected to last for some time.
Government sources said Mr Fraser was discussing with advisors whether foreign leaders should be evacuated from the hotel.
It is understood that security officials advised against this.
A man believed to be a NSW policeman on security duty outside the hotel was blown more than 10 metres through a plate glass window.
The bomb is believed to have been placed in a garbage bin in George Street, near the escalators leading to the hotel’s seventh-floor reception lobby.
The bomb went off with a shattering blast when the garbage bin was being emptied into the truck.
The man emptying the bin was blown to pieces, according to witnesses, and at least one of his work mates was seriously injured.
Paul Birmistriw, a police officer guarding the entrance to the hotel lounge, died after this story was published.