The attack outside a federal police office bore all the hallmarks of an operation by Al-Qaeda-backed Pakistani Taleban militants seeking to topple the government.
Provincial government official Khusro Pervaiz told reporters that 11 people were killed and 60 wounded in the blast.
"It's clear that the office of the investigation agency was the target," he said.
The violence may be a psychological setback for Pakistani authorities, who have made recent gains against homegrown militants and won praise from ally Washington after capturing high-profile Afghan Taleban figures.
A doctor at the hospital treating victims said the dead included a woman and a child.
The blast left a huge crater in the road outside the office of the main police investigation agency, the Federal Investigation Agency, and destroyed the front of the building.
The agency has been attacked at least twice before in Lahore.
Television showed pictures of a man covered in blood trapped in a car and passersby trying to help him out while rescuers searched through the rubble.
Some angry residents shouted at police as they arrived at the scene in Lahore's Model Town residential neighborhood.
"We repeatedly asked them to please move this office away from our houses but they didn't give a damn," one woman said.
Stock market investors, growing used to bomb attacks across the country, shrugged off the latest violence, dealers said.
"The market has become sort of immune to these acts of terror and it only reacts if the damage is huge," said Khalid Iqbal Siddiqui, director at brokers Invest and Finance Securities.
Dealers said healthy foreign flows into the market in recent days had helped investor sentiment.
The Karachi Stock Exchange's benchmark 100-share index was 0.67 percent higher at 9,690.54 at 0511 GMT.
