Local television showed hundreds of men and boys rushing out of the mosque.
The Press Trust of India (PTI) said that anti-riot police may have shot dead three people in violent protests which followed the attack on the 17th-century shrine.
PTI said: "There is confusion whether the other three [shot dead] succumbed to injuries or in subsequent police firing on people protesting in the aftermath of the explosion."
There was no immediate confirmation of the PTI report but officials from the federal secret service, the Intelligence Bureau, confirmed at least two deaths in police firing.
"This is an intentional sabotage of the peace and tranquility of the state"
Y.S. Rajasekhara Reddy, Andhra Pradesh state chief minister
Officials from Hyderabad said the bomb was placed close to the prayer area in the ancient shrine and two unexploded "improvised devices" were later defused.
High security alert
Y.S. Rajasekhara Reddy, Andhra Pradesh state's chief minister, said: "This is an intentional sabotage of the peace and tranquility of the state."
He added, however, that it was too early to speculate on what may have been behind the attack and appealed for calm in the state.
Witnesses in Hyderabad, one of India's most developed cities, said there was chaos after the blast.
"I heard the blast when the prayer ended. I saw people rushing out," said one witness.
A home ministry spokesman in New Delhi, the capital of India, went on a high security alert against further attacks.
In September 2006, a mosque in Malegaon in western India, killed 31 people and wounded 297.
In that attack, bombs mounted on bicycles exploded as thousands of Muslims emerged from Friday prayers. Police have yet to identify the perpetrators.
Analysts have said such attacks appear to be aimed at undermining the unsteady peace process between India and Pakistan launched in 2004.