The area around the site of the explosion has been cordoned off by security forces. The bus stand and the markets were crowded with people when the explosion occurred.
Witnesses said the markets were deserted immediately after the explosion, as panicked people ran for cover.
The incident comes close on the heels of the killing Monday of eight army soldiers in a deadly guerrilla ambush in Srinagar, on the eve of the visit of Prime Minister Manmohan Singh and Congress president Sonia Gandhi. At least 13 people were injured in the attack Monday.
Friday's explosion comes as the two-month-long annual Amarnath Yatra begins, amid tight security. There were intelligence reports of plans by guerrillas to attack the yatra.