"Initial reports indicate that three coalition soldiers were wounded in the incident," Lieutenant-Colonel Jerry O'Hara, a spokesman based in Kabul with the US-led coalition force said on Sunday.
Witnesses said they saw four soldiers being carried away in stretchers.
O'Hara said the explosion was caused by a roadside bomb, but police said it was a suicide attack and witnesses described how a Toyota saloon rammed into a Canadian vehicle at a crossroads.
Doctor Abdul Qaoum, at Kandahar's main hospital, said at least two civilians were killed and nine others wounded.
Qari Mohammad Yusuf, a Taliban spokesman, claimed responsibility.
"This attack is part of our jihad and we plan to carry out more such attacks," Yusuf told Reuters by satellite telephone from an undisclosed location.
Coalition troops cordoned off the site.
Taliban fighters have launched several suicide attacks, mainly targeting US-led troops and NATO peacekeepers during the past few months, but they have not caused major casualties.