"The children started playing with the bomb and all of a sudden it exploded."
He said it was unclear whether it was a "deliberate act of terrorism" or an accident, as the region is littered with unexploded ordnance abandoned by mujahideen fighters during their 1980s war against Soviet troops in Afghanistan.
'Grief and sorrow'
Yousuf Raza Gilani, the Pakistani prime minister, expressed "grief and sorrow over the loss of innocent lives of children in the explosion", an official statement said.
"Those playing with the innocent lives would not escape the wrath of Allah and law of the land," the statement quoted him as saying.
The prime minister also directed law enforcement agencies to closely monitor the "miscreants" trying to create a "law and order situation in the country".
Lower Dir, 75km from Swat, is part of Malakand, a region where the government has agreed to implement a stricter version of sharia (Islamic law) as part of a peace deal with Taliban.
In exchange for sharia courts, the fighters promised to lay down their arms.
During two years of violence in Swat, fighters have torched around 200 girls' schools in a campaign against female education, according to education ministry officials.