The blast outside a bank started a large fire that swept through nearby shops in Yala, the main city in one of three provinces near the Malaysian border that have been under emergency rule since 2005.
"There was a bomb hidden in a fire extinguisher in a pick-up truck parked in front of a grocery shop near Siam City Bank," a local police officer said. Of the casualties, four were seriously wounded, including three of the soldiers, authorities said.
Shadowy Islamic insurgents have waged a violent campaign in Thailand's southernmost region since early 2004, leaving more than 4,400 people dead, including both Muslims and Buddhists, in near-daily attacks.
Violence appears to have intensified recently: a bomb attack in Yala province killed nine villagers last month and an unusually bold attack by militants a week earlier on a military base left at least four soldiers dead.
On Thursday three people, including a teacher, were shot dead and their bodies burned in neighbouring Pattani province, in one of a series of gun attacks in the region last week.