An LBO reporter at the Colombo south hospital in Kalubowila said eight dead bodies had been brought and more than two dozen injured had been admitted to the hospital so far.
Friday's blast is the latest in a series of deadly explosions blamed on Tamil Tiger guerillas targeting civilians in the south of the island.
Tiger bombs also assassinated at least two ministers earlier in the year.
The blast came as the military said it gained control of an area in the Northwestern Mannar area and the guerillas beat back an offensive in the northern Jaffna peninsular with heavy casualties. .