The car left the road at Plan-de-la-Tour, in the Var region on France’s Mediterranean coast, emergency services told the Agence France-Presse news agency.
Numerous children are said to be among the 15 injured.
The accident took place when a car competing in the 14th annual Maures regional rally veered off.
The public prosecutor in Draguignan, Danielle Drouy-Ayral, said an official from her office was en route to oversee an investigation.
Drouy-Ayral said a race marshal was among the victims.
It appears a driver made a mistake at an intersection where they were supposed to turn right and instead drove straight ahead, crashing into the crowd.
The driver of the car suffered light injuries, France’s TF1 broadcaster reports.
He has been taken to hospital where it will be established whether his condition will allow him to be taken into custody, Drouy-Ayral was quoted as saying.
The rally, which covers 157km began on Saturday and was due to continue on Sunday.