The plane crashed at the bus terminal in the Yousuf Goth area, where ten parked buses caught fire, according to officials.
The terminal also caught fire but it was controlled by the fire fighters. TV channels showed smoke billowing out of site of the crash.
A PAF spokesman said a Wing Commander and a Squadron Leader were on routine operational training mission when the aircraft crashed.
Both pilots died in the incident while one man who is said to be a bus driver also died on the ground.
Wounded people were shifted to a local hospital.
The PAF spokesman said that the plan had developed a technical fault in its engine.