The blast occurred in the fruit market in Sector I-11 on the outskirts of the capital, bordering the garrison city of Rawalpindi.
"We have 20 bodies and three more bodies are in Holy Family Hospital. We currently have 54 injured out of which some are in very critical condition," Pakistan Institute of Medical Sciences (PIMS) Vice Chancellor Prof Javed Akram told PTI.
A 5 kg bomb was used and was planted in a crate of guavas that was brought to the market.
Over 100 people were injured in the attack and were rushed to PIMS and the Holy Family hospital in Rawalpindi, authorities said. Emergency was declared at both hospitals shortly after the explosion.
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No group claimed responsibility for the blast.
However, the Tehreek-e-Taliban Pakistan (TTP) spokesperson Shahidullah Shahid issued a statement condemning the blast and regretting the death of civilians in the attack.
He described such attacks, in which innocent civilians are targeted, as "un-Islamic".
"Around 1,500-2,000 people were at the market at the time of the blast," Inspector General of Police, Islamabad, Khalid Khattak told reporters at the blast site.
The blast site was strewn with severed body parts and bloodstained clothes amid fruit boxes.
The attack comes a month after the deadly terror assault on the premises of a court in the federal capital.
Though bombings happen frequently in Pakistani cities in the restive parts of the country, they are relatively rare in the capital.
The Taliban has announced a ceasefire till April 10.
President Mamnoon Hussain and Prime Minister Nawaz Sharif have strongly denounced the blast.
Interior Minister Chaudhry Nisar Ali Khan who visited the scene of blast has sought an immediate investigation report.