The bomb exploded during the morning rush hour near a busy intersection on Wednesday, damaging several police and private vehicles.
It occurred near a traffic crossing outside a private clinic at 10.45am in Srinagar's Lal Mandi-Gogji Bagh area, police officer H K Lohia said.
A member of India's Central Reserve Police Force (CRPF), one of several security forces combating a 16-year-old rebellion, was among those killed.
A spokesperson for the CRPF said a senior officer was among the injured. He added that most of the wounded were civilians.
Officials, who described the blast as massive, said the toll could rise as the conditions of some of the injured were "very critical".
"This is one of the most powerful explosions I have ever seen," said another police officer, who was among the first few to reach the scene.
Police and witnesses said three passing CRPF vehicles, a jeep carrying some local officials and several shops, were all destroyed.
Searching for assailants
Soon after the incident, police and paramilitary forces sealed off the area.
"We are searching for the terrorists responsible for the bloody explosion," Lohia said.
An unknown armed group calling itself al-Nasirin claimed responsibility for the attack.
A spokesman for the group told a local news agency over the phone that the outfit was planning to carry out more such explosions in its "fight for freedom".
The car bomb explosion came two days after the government offices shifted to Srinagar from Jammu, the winter capital of restive Kashmir.