A bus carrying the troops was passing a five-star hotel when suspected Kurdish rebels detonated a remote-controlled car bomb, authorities said.
Five civilians were killed, including two high school students who were leaving a building where they were taking courses for university entrance exams.
Thirty soldiers were among the 68 people wounded, said Diyarbakir Gov. Huseyin Avni Mutlu, according to the private Dogan news agency.
"A bomb left in a car ... was set off with a remote control. It was a very strong one. It was targeting a military service bus," Mutlu said.
Authorities blamed the blast on Kurdish rebels. Police said two suspects reportedly escaped the scene but authorities denied news reports that they were captured.
The attack - which shattered the windows of surrounding buildings and could be heard two miles away - appeared to be in retaliation for three airstrikes by Turkish warplanes against Kurdish rebel shelters in northern Iraq last month.
The pro-Kurdish Firat news agency reported the Kurdistan Workers Party's leaders in Iraq had declared big cities in Turkey targets.
There have been two explosions in Turkey's commercial center, Istanbul, in the past two weeks, killing one and injuring nine. No one has claimed responsibility for the attacks but Istanbul Gov. Muammer Guler blamed Kurdish rebels.
The rebel group, known as the PKK, has battled for autonomy in southeastern Turkey for more than two decades, a campaign that has left tens of thousands of dead. The group uses strongholds in northern Iraq for cross-border strikes.
In October, parliament authorized Turkey's military to strike back at rebels across the border.
Turkish warplanes took off from an air base in Diyarbakir minutes after Thursday's attack, Firat reported on its Web site. It was not clear if the jets were on a bombing mission.
The Turkish military claimed it killed up to 175 rebels in the first air assault Dec. 16, but the PKK denied the figure. Turkey has carried out the strikes largely based on military intelligence provided by the United States.
"Today's bombing in Diyarbakir is a horrific example of the senseless tragedy that terrorism brings," the U.S. Embassy in Ankara said in a statement. "We strongly condemn this violence and reiterate our determination to stand together with Turkey in combating terrorism in all its forms."
Prime Minister Recep Tayyip Erdogan also deplored the bombing.
"Unfortunately, terrorism showed its bloody face once more in Diyarbakir," he said. "Such events will not disrupt our determination against terrorism. Our struggle both on international and national levels will continue with the same determination."