The explosion flung body parts across the bazaar and gutted shops in Ustarzai, a small mainly Shia northwest town between the garrison city of Kohat and Hangu, another town with a history of sectarian unrest.
A spokesman for the little-known Lashkar-i-Jhangvi al-Almi militant group claimed responsibility.
The area was packed with shoppers buying food and delicacies for the weekend and the Muslim Eid al-Fitr holiday, which Pakistanis expect to start on Monday with the sighting of the new moon after the fasting month of Ramadan.
Bodies lay on the road and casualties were trapped under the debris from shops that caved in after the blast, which came when the bomber rammed a jeep packed with 150kg of explosives into another vehicle.
Police spokesman Fazal Naeem in nearby Kohat said 33 people were killed and 56 wounded. "There are 33 dead and more than 50 injured. Twenty-five have been identified while the rest are in a very bad condition. The bodies have been completely damaged," said a North West Frontier Province police spokesman.
Police said the bomber came from the nearby Orakzai, the tribal district home of Pakistan's new Taliban chief, Hakimullah Mehsud, who has vowed to avenge the death of his predecessor, Baitullah Mehsud, who was killed in a US drone strike.
"This is a Shi'ite-dominated area and we cannot rule out the possibility that this was a sectarian-motivated attack," said police officer Ali Hasan.
Soon after the blast, Shia youths took control of the bazaar and attacked two police vehicles with sticks and chanted slogans condemning the Taliban and the Pakistani government.
"Dozens of shops were destroyed. Their roofs caved in and many people were trapped under the debris," said Mr Hasan.
Prime Minister Yousuf Raza Gilani condemned the "cowardly act of terrorism" and said the government was determined to "stamp out the menace of terrorism and militancy from the country".
Pakistan claims to have cleared the Taliban from the northwestern districts of Buner, Lower Dir and Swat.
Government troops have also launched operations against a local Taliban-linked warlord in the semi-autonomous Khyber tribal region, which lies on the main supply route for Western troops in neighbouring Afghanistan.
Source: The Australian