The blast, the second bombing in less than a week, occurred on Monday close to Pakistan's army headquarters in the garrison city.
The attack off Mall Road was close to the Pearl Continental Hotel and near Pakistan's army headquarters, where 10 fighters mounted a nearly 24-hour siege last month that left 23 people dead.
Death toll rising
A senior police official said the attack was the work of a suicide bomber.
"The suicide bomber came on a motorcycle and blew up close to people gathered to get salaries. We found parts of a suicide vest and some body parts of the suicide attacker," Aslam Tarin, senior police official, said.