The blast occurred in the center of Novi Pazar, where tensions between two rival political parties have increased recently.
Police gave no other details on who might have been behind the explosion or what the exact target was.
Novi Pazar is in the heart of the mostly Muslim-populated Sandzak region, 175 kilometers (110 miles) south of Belgrade, near the border with Bosnia.
Days earlier, the central government in Belgrade ordered Novi Pazar's municipal assembly to be dissolved over alleged mismanagement.
That effectively stripped the region's dominant party of its local authority and cleared the way for a rival party that is part of the governing coalition to assume power in the area.
The area was mostly spared from bloodshed during the violent breakup of the former Yugoslavia, but the tensions between the local political groups are a threat to stability, Serbia's Deputy Prime Minister Miroljub Labus warned recently.
The local party that was knocked from power, the Sandzak Democratic Party, is headed by Rasim Ljajic, who has served as Serbia-Montenegro's top official in charge of contacts with the U.N. war crimes tribunal in the Netherlands.
Angered by the government's move against his party on the local level in Sandzak, Ljajic has threatened to quit the job, but has made no final decision pending talks with the government of Prime Minister Vojislav Kostunica.
Ljajic was not immediately available to comment on the Novi Pazar blast, while his political party said it would issue a statement later Tuesday, reports the AP.
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