Firefighters struggled to put out the flames in the nearby building where people were seen clinging to windows, shouting for help.
Several vehicles were damaged and the windows of adjacent stores were shattered in the blast.
Al Jazeera's Imran Khan, reporting from the capital, Islamabad, said: "It [the explosion] was in the middle of Peshawar, in a very busy district.
"There are many injured and an emergency has been declared at the Lady Reading hospital."
The explosion follows a string of attacks in the country.
On Friday, an attack on a mosque frequented by army personnel in the garrison city of Rawalpindi killed 37 people.