Officials at the main hospital in Vavuniya said about 40 people were taken there for treatment following the blast.
Vavuniya borders territory further north of the country held by the Tamil Tigers who are fighting for a separate Tamil homeland in the  majority Sinhalese island.
"The level of violence [in the area] we have seen increasing over the last few weeks and last few months," Minelle Fernandez, reporting for Al Jazeera's from Sri Lanka, said.
"We've [also] seen a number of explosions and attacks in and around Colombo and the government has said this is a sign of the increasing desperation of the LTTE," she said.
'Air strike'
Monday's suicide blast came after Sri Lanka's military said its air force had destroyed a Tamil Tiger separatist base in the north and 19 fighters and two soldiers had been killed in sporadic ground fighting over two days.
Pilots said "the entire terrorist complex was on fire after the air strike" on Sunday in Puthukudiyiruppu village in the Tiger-held Mullaitivu district, according to a military statement.
Separately, several ground battles broke out in the northern Mannar and Welioya fronts on Saturday and Sunday, killing 19 fighters and two soldiers, the statement said.
The latest of these clashes was reported on Sunday in Mannar, killing four fighters, it added.
But Rasiah Ilanthirayan, a Tiger spokesman, said the air strikes had hit a civilian area, killing two people, and denied that any separatist fighter had died in the clashes.
Both sides routinely release contradictory reports on the war, exaggerating the damage on the opposing side while playing down their own losses.