The accident took place on Sunday when the US embassy vehicle, a Toyota Land Cruiser, collided with the car coming from the other direction, reports Dawn news.
The incident reportedly occurred due to one of the vehicles breaking the signal.
The injured and the dead were shifted to the Pakistan Institute of Medical Sciences (Pims), where the deceased woman was identified as Nazia Bibi.
According to a police spokesperson, a minor girl who was injured in the accident is in critical condition.
Police said the US embassy vehicle was being driven by a Pakistani driver and it wasn't immediately clear if there were other people in the car.
In recent years, several traffic accidents involving vehicles of the US embassy and consulates have taken place in various cities, said Dawn news.
In April 2018, a motorcyclist in Islamabad was killed after being hit by a vehicle driven by the military attache at the US embassy.
In February 2013, an administrative assistant at the US embassy hit two motorcyclists with his Land Cruiser. A man was killed and another was injured in the accident.
In July 2010, a US embassy officer attached to the embassy's Force Protection Department hit and killed a young man riding a motorcycle.
In 2011, a Central Investigation Agency contractor, Raymond Davis, caused outrage throughout the country after he killed two Pakistani citizens when he hit a motorcycle in Lahore.
The incident had strained ties between Pakistan and the US. Davis was led out of the country.
( With inputs from IANS )