The blast, which occurred shortly before 10 am local time in the village near Mian Channu in southern Punjab, was caused by explosives stored in the home of madrassa teacher Riaz Ali, local residents said.
Ali was a member of a banned religious group, officials said.
Police and rescue service officials told reporters that 16 people, including several children, were killed in the blast, which also destroyed dozens of houses.
Muhammad Yousuf Soomra, health officer of Khanewal district, said the toll could rise as more bodies were feared to be buried under the rubble of collapsed homes.
It was not immediately known what triggered the blast. Rescue workers found parts of shells and bombs, grenades, rockets and suicide jackets in the rubble of the madrassa.
Officials said the seminary was being used to make bombs.
Doctors in local hospitals said 120 injured people had been brought for treatment. Over 40 of them were admitted to hospitals while many were allowed to go home after being given first aid. An emergency was declared in all hospitals near Mian Channu.
‘Jehadi’ material, including cassettes with militant propaganda and pamphlets of the Harkat-ul-Jehad al-Islami terrorist group, were also found in the debris of Ali’s house, Geo News channel reported.
The blast created a crater 40 feet wide and eight feet deep. The explosion flattened about 25 structures, including a rural health centre and the madrassa, a police official said.
Rescue efforts were hampered by large crowds that gathered at the site of the blast. The lack of earth moving equipment also affected efforts by rescue workers to sift through the rubble.
Minister Yousuf Raza Gilani condemned the blast and ordered authorities to launch an immediate inquiry into the incident so that the culprits could be brought to justice.