Spokesman Lieutenant Colonel Daniel Lucero said on Thursday the home-made device exploded near a video game store.
"Initial reports disclosed the casualties were mostly children. There will be a fiesta (festival) there tomorrow," Lucero told reporters in Manila.
There has been no claim of responsibility. But regional army chief Major General Generoso Senga said the explosive device was similar to those used in previous attacks blamed on the separatist Moro Islamic Liberation Front (MILF).
That charge was denied by the group. "We highly condemn this act. What benefit will the MILF get from this?" MILF spokesman Eid Kabalu asked reporters.
The MILF has been fighting government troops for almost three decades now to achieve an independent Muslim state in the south of the country.
Peace talks have broken down several times but Malaysia is offering to broker negotiations starting this month.
Presidential spokesman Iganacio Bunye said he did not think the incident would get in the way of negotiations with the MILF.
"We have gone this far already, and we believe that we have made a significant headway, and we should not throw some obstacles to the pursuit of genuine peace for those who earnestly want to have peace," he said.
Thursday's bombing was close to the site of a similar blast in May in which the Abu Sayyaf rebel group which Washington has linked to the Al-Qaeda network, claimed responsibility.
Provincial governor Daisy Fuentes said a man seeking to extort money called the mayor of Koronadal prior to the blast.
"This man has introduced himself as Abu Solaiman," Fuentes told local television.
It could not immediately be determined if the caller was the Abu Sayyaf leader of the same name, who, along with four others, is wanted by the US for kidnapping its nationals.
The Abu Sayyaf, which gained notoriety for its kidnap-for-ransom activities, is one of four major rebel groups fighting for an Islamic state in the south of the country.