Talking to news agencies, police official Mohammad Khan said a minibus packed with explosives detonated along a road near the market and passengers were apparently in the vehicle that time. A witness said, "I can see the burnt vehicle and people are removing the dead from it." He added, "I have myself counted five bodies."

Provincial Health Minister Syed Zahir Ali Shah confirmed the death of 41 people, saying more than 100 people sustained injuries.

Also on Friday, Pakistan Interior Minister Rehman Malik said a suspect was arrested in relation to the Monday suicide attack that killed five at a UN office in the capital. Malik says the man was alleged to have given the attacker shelter.

Friday's attack is the second in the north-western Peshawar city in two weeks and the latest to show that the militants are capable of striking Pakistan's cities despite fending off military offensives.

In a separate report early on Friday, militants ambushed a tanker carrying fuel for the Western troops at a gas station near Peshawar, torching it. A police official said no injuries or deaths were reported.

The attacks come amid growing tensions between the US and Pakistan over a multi-billion dollar US aid package that is aimed at helping Pakistan's economy and other non-military sectors.