The blast will likely feed fears for the country's stability just as it prepares for crucial parliamentary elections and faces a growing threat from Islamic militants.
The man had walked up to a checkpoint in the city of Rawalpindi just a a quarter-mile from Army House. Musharraf was safely inside at the time, his spokesman Rashid Qureshi said.
Police said three of their officers and four civilians were killed along with the lone assailant. Fourteen policemen and four civilians were wounded, he said.
"When police officers asked him to halt, the attacker got panicked. And as the police tried to capture him, he blew himself up," city police chief Saud Aziz told The Associated Press. "Our officers died to protect the citizens of Pakistan."
The attack left the area around the checkpoint, which guards a road leading to Army House and the residences of several top generals, strewn with human flesh and torn clothing.
An Associated Press photographer saw emergency workers remove the body of an elderly man killed as he was riding by on a bicycle.
Police said women and children aboard a passing minibus were also among the dead and wounded. Television footage showed schoolbags abandoned on the seats of the vehicle, whose windows were blown out.
Investigators cordoned off the area to retrieve evidence. A policeman climbed an overhanging tree to dislodge part of the bomber's severed head.
Fortified army posts at the checkpoint and the nearby gate to the residence of Gen. Tariq Majid, the army's No. 3 commander, were scarred with shrapnel and spattered with blood.
While there was no claim of responsibility, Pakistan has been rocked by a string of suicide bombings mostly blamed on Islamic extremists.
An attack on the homecoming parade of former Prime Minister Benazir Bhutto on Oct. 18 in the southern city of Karachi killed more than 140 people.
In Rawalpindi, a garrison city just south of the capital Islamabad, two blasts on Sept. 4 killed 25 people and wounded more than 60, many of them on a Defense Ministry bus.
Pakistan has suffered a surge in suicide attacks since Musharraf's decision in July to crack down on militants tightening their grip on areas along the Afghan frontier.
U.S. officials warn the area has become a haven for Taliban militants fighting in Afghanistan and that al Qaeda may be using it to plot fresh attacks on the West.
Last week, Pakistan sent troops to tackle supporters of a pro-Taliban cleric in the northwestern district of Swat. Officials say four days of violence in the once-peaceful mountain region has left around 100 people dead.
Musharraf, who has survived at least three attempts on his life, is widely expected to join forces with Bhutto in a U.S.-friendly alliance, provided her party fares well in January parliamentary elections.
Both are stressing the need for moderates to pool their strength to defeat extremism and terrorism - making them prime targets for Islamic hard-liners who deride them as U.S. stooges.
Extremists are trying hard to secure a "big catch," said Sheikh Rashid, a senior Cabinet minister and close political ally of Musharraf.
"There may be some forces who want to give some big message that they are here, they are in Rawalpindi, they are in Islamabad," Rashid told Dawn News television. "This is a very critical time and critical situation."