The bomb went off on a road in the city centre, some 100 metres (yards) from a military base and billets, as an army vehicle carrying some 50 soldiers was passing, Governor Huseyin Avni Mutlu told reporters.

There was no claim of responsibility for the blast but immediate suspicion fell on the separatist Kurdistan Workers' Party (PKK), which has carried out a number of previous attacks in the area in recent years.

Prime Minister Recep Tayyip Erdogan and the US embassy in Ankara condemned the blast as a "terrorist act."

The PKK, listed as a terrorist group by Ankara and much of the international community, has threatened retaliation following Turkish air strikes on its bases in northern Iraq last month.

The blast destroyed the military vehicle and five cars and ignited a large blaze that was later extinguished by firefighters.

Two of the five victims were young -- one a high school girl arriving for evening classes in a nearby private school, the other a boy selling tissues in the streets, officials said.

Those hurt included about 30 soldiers as well as civilians and teenage students. Several of them suffered serious injuries.

The car bomb was set off by remote control, Governor Mutlu said, as bomb experts combed the scene and police collected tapes from the security cameras of nearby shops.

A teacher at the private school training pupils for university exams spoke of a "great disaster" being avoided as about 500 students were set to leave the building at the end of classes.

"There was a loud bang and the lights went off. We evacuated the students from the back door," Nesim Cecen told AFP.

"Had it happened 10 minutes later, it would have been a great disaster as all the children would have been in the street," he said.

Another witness, Cabir Ocal, who was shopping at the site of the bombing described his narrow escape.

"I had just returned to my workplace when it went off," he said. "The windows of the building and their frames were all shattered."

Police said they were looking for two people that witnesses had seen fleeing the scene.

"Terrorism has reared its ugly head again. But these incidents will not affect our determination to fight terrorism both at home and abroad," Erdogan said in Ankara.

The US embassy condemned the blast as "a horrible example of the meaningless tragedies caused by terrorism" and vowed "determination to stand by Turkey in the struggle against all kinds of terrorism."

The blast came as the Turkish army, aided by US intelligence assistance, stepped up action against PKK rebels who use neighbouring northern Iraq as a springboard for attacks across the frontier in Turkey.

The military has confirmed three air strikes on PKK positions in northern Iraq since December 16, in addition to a cross-border land operation to stop a group of rebels from infiltrating Turkey.

Local Iraqi officials have reported two other air raids.

At least 150 militants have been killed and more than 200 PKK positions destroyed in the raids so far, according to the Turkish military.

PKK rebels have been blamed for several bomb attacks in Diyarbakir and other major cities in the recent past.

Seven people were injured in June when a bomb, blamed on the PKK, exploded near a bus stop in central Diyarbakir.

In 2006, 10 people, including seven children, were killed and 14 injured in a bomb blast at a crowded city park, which officials also blamed on the PKK.

More than 37,000 people have been killed since the PKK took up arms for Kurdish self-rule in the southeast in 1984.