The attack in Usterzai village on the outskirts of Kohat town was the second in two days in the area, which is not far from the Afghan border and has witnessed past incidents of violence between Sunni and Shiite Muslims. A bomb Thursday in Kohat wounded six people.
The small Hikmat Ali Hotel, which was among several buildings badly damaged in Friday's blast, is located in a roadside market. It is owned by a Shiite, police official Asmat Ullah said.
The violence underscores the relentless insecurity in a region home to the Taliban and al Qaeda, whose Sunni extremism has only fueled sectarian attacks that have long plagued Pakistan.
A senior security official in Peshawar told CBS News, "This attack is being treated as a targeted strike at 'Shia' Muslims. We are convinced the Taliban are behind this attack. I fear, this attack may be the revival of a suicide bombing campaign." he said.
Militants continue to mount attacks despite military offensives aimed at Taliban fighters over the past year. The U.S. is particularly anxious for Pakistan to clamp down on militants it says are behind attacks on American and NATO troops across the border in Afghanistan.
Police official Ali Hassan Khan said Friday's bomber was in a vehicle.
The blast destroyed several cars, and several shops at the Kacha Paka market caved in.
Area mayor Syed Mehtabul Hassan told The Associated Press that 25 bodies were pulled out of the rubble of the hotel and nearby shops and that several other people were wounded.
Footage from a hospital aired by Pakistan's Express news channel showed some of the wounded in beds and on stretchers. The men were bloodied, bandaged and seemingly in shock.
Kohat is a garrison town around 40 miles south of Peshawar, Pakistan's main northwest city. On Thursday, six people were wounded when a bomb planted outside a shop in Kohat exploded.
Pakistani Prime Minister Yousuf Raza Gilani condemned Friday's attack in a short press statement.
Last month, Baitullah Mehsud, leader of the main Taliban militant umbrella known as the "tehreek-e-taliban," or TTP, was killed in a missile attack believed to have been carried out by a CIA unmanned drone. Mehsud was widely known among Pakistani security and intelligence officials for overseeing the training of hundreds of volunteers in the use of explosives as well as carrying out suicide attacks, CBS reporter Farhan Bokhari reports.
His killing prompted a feud within the militants' camp to find a successor. Mehsud's killing also fuelled speculation that the Taliban will be weakened after his death. On Friday however, a senior Western defense official speaking to CBS News on condition of anonymity in Islamabad warned that the militant movement may still be capable of carrying out large scale attacks. "If its eventually proven, the Taliban were behind the attack in Kohat, that would be very serious. The attack would then suggest these people are still very, very lethal," the Western defense official said.
Pakistan's military, however, has made gains in the region over the past year.
A four-month-old army offensive against Taliban militants in the Swat Valley has - according to the military - killed more than 1,800 alleged militants, while at least three top leaders of the Swat Taliban have been arrested.
Government officials say the army is also closing in on Swat Taliban chief Maulana Fazlullah, whose radio broadcasts long spread fear among residents of the valley.
Search and clearance operations over the previous 24 hours in Swat led to the arrests of seven militants and surrenders of another 13, the Pakistani military said in a Friday statement.