Authorities believe a rebel was transporting the bomb when it went off accidentally in Bijbehara town, some 28 miles (45 kilometers) south of Srinagar, police officer Ramesh Jalla said.
The driver was killed in the blast, which occurred on a busy road. At least 20 others who had been passing by were wounded, including seven who were taken to a special hospital in Srinagar for treatment of multiple injuries. One victim was in critical condition.
"It seems the militant was carrying the bomb to plant it somewhere to target security forces," he said, noting the car had just passed a police station before it exploded.
There was no immediate claim of responsibility for the blast.
While militants have been fighting since 1989 against Indian rule in the disputed Himalayan territory, incidents of violence have largely been suppressed by Indian forces. In recent years, anti-Indian protest has mostly been expressed through street demonstrations marked by youths hurling stones.
More than 68,000 people have died in the last two decades of conflict and by subsequent Indian crackdowns.