General Uthman al-Ghanimi, the security chief for Karbala, said "the explosion came as a result of a small, locally made bomb" in an area one kilometre from the Imam Hussein shrine.
However, a police officer told AFP that a suicide bomber had triggered the blast.
The attack in Karbala came a day after at least 12 people were killed and more than 40 wounded in bombings in Baghdad that also targeted Shia pilgrims.
Thousands of Shia pilgrims have been converging on Karbala in recent days, to celebrate Ashura - a ceremony to mark the end of symbolic mourning for Imam Hussein, Prophet Muhammad's grandson.
Since the invasion of Iraq by US and British-led forces, Shia pilgrimages on Karbala have frequently been attacked by fighters, often with very high casualties.
In other incidents, a car bomb in Mosul killed four policemen and wounded three people, police said.
Elsewhere in Mosul, armed men killed a local Sunni Muslim official on Thursday, police said.
It was the second assassination of a locally prominent Sunni politician in as many days in a city where al-Qaeda in Iraq still has a strong presence.
Meanwhile, in the southern city of Basra, a British soldier was killed in a "shooting incident", the ministry of defence (MoD) in London said.
"It is with deep regret that the MoD must confirm that a soldier serving with 1st Battalion The Princess of Wales's Royal Regiment died this morning in a shooting incident," a ministry statement said on Thursday.
"The circumstances surrounding the incident are still being investigated."
In December last year two British soldiers died at the same base from bullet wounds.
At least 179 British troops have died in Iraq since 2003.