"From our preliminary reports, we have 17 dead and at least five injured from the blast in the post office area" in Maiduguri, the police chief for Borno state, Lawan Tanko, told AFP.
Tanko warned that toll could rise as casualties were taken from the bustling market to medical centres for treatment.
"These figures are likely to change by the time we get full reports from our men in the field," he said.
"The bomb was detonated in the midst of a large crowd of traders while a truck carrying firewood was passing by," said Tanko.
More From This Section
The explosion happened at about 1:30 pm (1230 GMT) in a part of the city hit previously by militants from the outlawed Islamist group Boko Haram.
"An explosive device concealed in a sack was abandoned near a butcher's stall by unknown persons around Kasuwar Jagwal," which hosts meat and grocery stalls, said trader Buba Adam Kolo.
Another trader, who gave his name as Musa Abba, said: "I can't say if there are any deaths but it's possible because it happened during peak hours."
The explosion caused panic in the city, which like most of the rest of northern Nigeria is majority Muslim and was celebrating Eid Milad un Nabi.
"Everybody was running to save themselves," said Kolo, while other eyewitnesses described the scene as "pandemonium".
A police officer, who asked not be identified because he was not authorised to speak to the media, said the impact of the blast could be felt three kilometres (nearly two miles) away.