Hospitals are struggling to deal with the high number of wounded and have appealed for blood donations.

The blast left a deep crater and a brought down a nearby building.

'Instability increasing'

Police said the bomb had been placed in a car parked outside a Shia mosque in the city's main Qisakhawani bazaar, but it was not clear if the mosque was the target.

Khalid Aziz, a former chief secretary of Peshawar, told Al Jazeera that the city has become increasingly unstable.

"The surroundings of Peshawar are full of militants and the city has become very insecure," he said.

"This attack was an attempt to demonstrate dominance within the region, to show that the militants can't be written off," he said, without specifying who the "militants" might be.

No group has come forward to claim the attack, but sectarian tensions between Sunni and Shia Muslims have simmered for many years.

Second explosion

Mazhar Zaidi, a Pakistani film-maker and journalist, told Al Jazeera that armed groups in Pakistan are employing new tactics as the country's military wages a security operation against them in Pakistan's tribal regions.

"The [Pakistani military] operation in the tribal areas is supposedly going pretty well, so these groups are now operating in the urban centres of Pakistan. That is a new trend," he said.

Rescue workers were operating in the dark as the bomb cut off power lines [EPA] 
"These groups in the tribal regions are being squeezed between the Nato forces [in Afghanistan] and the Pakistani forces - so they have changed their tactics and gone back to the cities."

Earlier on Friday, at least six people were killed and several others wounded in a bomb blast in the town of Kalaya in the tribal area of Orakzai. 

The explosion was also in a market, with reports conflicting as to whether the blast was a suicide attack or not.

The Reuters news agency cited an unidentified intelligence official as saying that the blast was a suicide attack by a man targeting a local tribal council.

"The bomber tried to drive into a market in a Shia neighbourhood where the meeting was taking place but blew up his car when police tried to stop him at a checkpoint," the official said.

But the AFP news agency quoted an official saying the bomb was placed in a parked car and seemed to be detonated remotely.

Increasing violence

Pakistan's army and paramilitary forces do not have a presence in Orakzai, where security is managed by tribal police.

Sectarian violence has increased in northwest Pakistan over the past year.

Security analysts say al-Qaeda and Taliban fighters have stirred up divisions between Sunni and Shia Muslims as they expand their influence through the northwest.

Orakzai has been relatively peaceful over the past year compared with other tribal regions but in October, more than 50 people were killed in a suicide attack at a tribal council called to draw up a strategy to evict fighters from the area.

Shias account for about 20 per cent of Pakistan's population.