Police sealed off the area and launched a joint investigation with Kfor, the Nato-led peacekeeping force in the region.
One witness said: "I thought the whole of Pristina collapsed. Kids began crying, we were confused, we had no idea what was going."
The explosion comes as a "troika" of US, European and Russian envoys struggle to find a breakthrough in talks on the possible independence of Kosovo.
However, in a statement condemning the attack, the Kosovo government said that there were no signs of a link between the explosion and the current talks.
Avni Arifi, a government spokesman, said: "There is not a single indication that the explosion has any relations with the political process that Kosovo is going through.
"The government is fully committed to fight against any crime and to create a peaceful environment."
Terry Davis, secretary-general of the Council of Europe, said the attack was "disturbing even if at this moment the origins of the explosion are not yet known".
Davis said in a statement: "We all hope that this incident will not turn out to be a terrorist attack. I am confident that the authorities of Kosovo are investigating the causes of the explosion as a matter of urgency. Meanwhile, we should not rush into any conclusions."
The territory, which has a 90 per cent ethnic Albanian population, has been run by the United Nations (UN) and patrolled by Nato since 1999, when Nato drove out Serbian forces to halt atrocities against ethnic Albanians in a two-year war between Belgrade's troops and the separatists.
Leaders of Serbia and Kosovo are expected to hold direct negotiations on the territory's future on Friday on the sidelines of the UN General Assembly.
Pristina has seen small bomb attacks at times of political tension over the past three years. Mafia feuds are also common.
The West supports independence, but Russia, Serbia's ally, has blocked a plan for Kosovo's statehood at the UN Security Council.
The talks began last month under the mediation of the United States, Russia and the European Union (EU).
They have to report back to the UN by December 10, when Washington says a decision must be made. Moscow rejects any deadline, saying talks should continue until the two sides reach agreement.