Phuentsholing, about 180 km from the capital Thimphu.
"Security has been intensified and we are trying to zero in on the people responsible for planting the improvised explosive devise," a senior police official said. The bomb was later defused.
The Bhutan Tiger Force (BTF) and the Bhutan Revolutionary Youth (BRY) have claimed responsibility for planting the explosive.
"There was a handwritten note kept near the bomb that mentioned the two organisations (BTF and BRY) claiming responsibility for setting up the device," the police official, who wished not to be named, said.
The BTF is the armed militant wing of the Bhutan Communist Party, a group formed by Bhutanese refugees currently residing in Nepal.
The party had earlier announced an armed rebellion to overthrow the Bhutanese regime and accuses the monarchy of being autocratic, violating human rights, and indulging in corruption.
"The BTF is out to create trouble inside Bhutan and this is the second time when such a thing has happened. Not much is known about the identity of the other group (BRY)," the official said.
Police blamed the BTF for making an unsuccessful attempt to trigger a blast last month in Phuentsholing.
The usually peaceful kingdom of 600,000 people was rocked by a blast in the same town in December in which four people, including three Indians, was injured.
Phuentsholing is close to the Indian border town of Joygaon in the eastern state of West Bengal.
There are an estimated 100,000 Bhutanese refugees residing in makeshift camps in Nepal after they fled the kingdom in 1997 following a pro-democracy uprising.
Bhutan has since outlawed political parties formed by those in exile, referring to them as anti-national terrorists and claims that many of the refugees are not genuine Bhutanese.
Bhutan last week held 'dummy elections' as a warm up to democracy.
The scheduled parliamentary elections next year are the culmination of a plan by former king Jigme Singye Wangchuck - who handed his crown to his young Oxford-educated son, Jigme Khesar Namgyel Wangchuck, in December - to change with the times and relinquish absolute rule.