The explosion Sunday appeared to have been caused by a bomb planted in a parked car and detonated by remote control, said police officer Zahid Khan. It went off near a mosque and a police station, damaging the house of worship and nearby shops and engulfing many vehicles in flames, police said.
At least 40 people were killed and 90 wounded, said Jamil Shah, a spokesman for Lady Reading Hospital, where the victims were taken.
Such attacks in Peshawar, in northwestern Pakistan, have claimed more than 140 lives since last Sunday, when two suicide bombers blew themselves up in a crowd of worshippers at a church, killing 85 people. On Friday, 19 people died when a bomb planted on a bus carrying government employees exploded in the Peshawar outskirts.
The Sunni militant group Jundullah claimed responsibility for the church attack, saying it targeted Christians to avenge the deaths of Muslims killed by U.S. drone strikes.
The dead included 14 members of a single family who were visiting Peshawar to plan a wedding along with their driver and an assistant, said relatives. Mohammad Alam said the group had come to Peshawar from a nearby village to invite him to their son's wedding. He said they were in a van when the bomb exploded.
A bookshop owner, Nazar Ali, had just opened his shop when the bomb went off.
"It was a huge blast that was followed by fire in vehicles. Thick black smoke covered the air and splinters spread all over. I saw people lying dead and bleeding all over," he said.
Many of the old buildings in the historic Qissa Khawani market are made of wood, which easily caught fire, said senior police officer Shafqat Malik. People bloodied and covered with ash ran from the scene, one man carrying a young child whose face appeared blackened from soot.
The new government of Prime Minister Nawaz Sharif has said it would like to negotiate with the militants to end the bloodshed, but so far those efforts have made little progress.
On Saturday, a spokesman for the Taliban said Sharif's demand that the militants lay down their weapons and respect the constitution indicated the new leader is not serious about peace talks. Previously Sharif had not given preconditions for the talks.
Sharif "showed that he is following the policy of America and its allies," the spokesman said. "We will hold talks with (the government) only when it gets the real power to take decisions."
Also in northwestern Pakistan, two missiles from an American drone hit a compound in North Waziristan on Sunday, killing three militants affiliated with the Punjab province branch of the Pakistani Taliban, said two intelligence officers.
That strike was followed by another on Monday morning, also in North Waziristan. The suspected American drone strike killed four alleged militants, said intelligence officials.
They did not have exact information on which group the militants killed in Monday's attack belonged to but said the area is dominated by fighters of warlords Hafiz Gul Bahadur and the Haqqani network, who are both known for targeting NATO troops in Afghanistan.
The officials spoke on condition of anonymity because they were not authorized to speak on the record.
The Pakistan government condemned both the bomb blast and Sunday's drone attack.