A second bomb exploded minutes later as members of the security forces and rescue workers arrived at the site.
The second device was also apparently triggered from a distance, and as many as 11 people may have been killed, the source said.
There was no immediate claim of responsibility.
Algeria's al-Qaeda affiliate, al-Qaeda in Islamic North Africa, is known to be active in the area.
The armed group has mounted increasing attacks over the past two years.
Bernard Kouchner, the French foreign minister, condemned the attack in a statement issued late on Sunday.
"I want to express my feeling of disgust and my absolute condemnation of this blind terrorist violence that nothing can justify," he said.
The latest attack comes during a spike in violence in the region.
On Wednesday, a suicide attack on a military barracks and a second bombing at a cafe shook a beach neighbourhood outside Algiers, wounding six people.
And on Thursday, a roadside bomb killed six soldiers in the city of Boumerdes.