Class I protostars(1) are very young, low-mass stellar objects that are, according to current models, composite : they include a central star (still in the process of formation) surrounded by an accretion disk similar to 10-100 AU in radius and embedded in an extended, infalling envelope of gas and dust up to similar to 104 AU in size(2). X-ray emission from such protostars has recently been reported(3,4), suggesting that X-ray ionization of gas and heating of dust could profoundly influence the physical and chemical properties of young stellar systems. But these observations did not have the resolution necessary to rule out a non-protostar origin for the emissions. Here we report X-ray observations of one of the nearest star-forming regions-the rho Ophiuchi cloud-that clearly show an intense X-ray flare associated with a deeply embedded protostar. The peak X-ray luminosity, after correcting for extinction, is greater than or equal to 10-100 times the Sun’s bolometric luminosity. The behaviour and intensity of the flare can be modelled as arising from a magnetically confined, low-density plasma bubble similar to 0.05-0.3 Au in diameter (much larger than the star itself), and the X-ray luminosity equals or exceeds the bolometric luminosity of the forming star. Taken together the evidence suggests that the X-rays are not created by the type of magnetic activity seen on the Sun or on other young low-mass stars, but rather are associated with processes in the circumstellar accretion disk or within the envelope.