The blast, which was blamed on Kashmiri fighters, ripped through the Poonch town, about 250km north of Jammu, winter capital of Jammu and Kashmir state.
The dead included a civilian, assistant police inspector and a suspected fighter.
Groups fighting Indian rule in the disputed region had vowed to continue attacks on security forces and said they would not observe a ceasefire agreed last month between India and Pakistan.
Elsewhere in the disputed region, police used force and detained dozens of Kashmiris staging protests to mark International Human Rights Day on Wednesday, denouncing alleged excesses by government troops.
They said police used teargas and batons to disperse a demonstration led by separatist leader Sayyid Ali Gilani and several hundred of his supporters in the Raj Bagh quarter of the summer capital Srinagar.
The protesters had carried posters demanding an end to human rights abuses carried out during long-running efforts to quash insurgency in Kashmir, control of which is disputed by Pakistan.
Gilani and dozens of supporters were pulled into security force vehicles and driven to a police station, while police used bamboo truncheons to charge more than 200 demonstrators in another district of Srinagar, witnesses said.
Indian policemen beat protesters
Among those seized during the demonstrations, staged annually in Kashmir, was Javad Mir, vice chairman of the separatist Jammu Kashmir Liberation Front (JKLF).
A press statement by the region’s main separatist alliance, the All Parties Hurriyat Conference, alleged that human rights abuses had risen despite the creation of a reforming new Kashmir leadership a year ago.
“There has been no decline in the human rights violations by Indian troops since the new government took charge,” the statement said. “The violations have increased.”
Reformist leader Mufti Muhammad Said took charge of Indian Kashmir last November when his regional party, in alliance with India’s main opposition Congress, swept state polls, boycotted by separatists.
Said had promised to embark on military reforms to end rights abuses and wind down the 14-year-old anti-Indian rebellion that left thousands dead.
The statement, issued by the Hurriyat faction led by the pro-Pakistan Gilani, urged “international intervention to safeguard the human rights of Kashmiris.”
The statement also urged the world community to “support Kashmiris in their quest for right to self-determination.”
Over the past five decades there have been a slew of UN Security Council resolutions calling for a plebiscite in the region to choose between India and Pakistan – two nuclear-rivals who hold Kashmir in parts and claim it in full.