A senior Pakistani official tells CBS News the attack is being investigated as a possible reprisal for Sunday's killing of Mullah Dadullah — a senior Taliban commander in Afghanistan.
No group claimed responsibility for the blast, which deepened instability in Pakistan, still reeling from bloody political riots during the weekend in its commercial capital, Karachi.
Provincial police chief Sharif Virk said investigators had found two legs of the suspected suicide bomber, with a message attached to one leg saying anyone working for America would meet this fate.
The explosion ripped through the reception area of the four-story Marhaba Hotel in Peshawar's old city. Rehmatullah Khan, a Peshawar police officer, said the blast was the result of "terrorist activity," but named no suspects.
Another city police official, Iftikhar Khan, initially reported one fatality and six wounded and said they were all Pakistanis. An intelligence official said the hotel was also popular with Afghans and that it had been crowded with people eating lunch. The official asked that he not be named for security reasons.
Police said they had evacuated the hotel, which lies in a busy market area, cordoned off the scene and opened an investigation.
Dadullah, who lost a leg while fighting troops from the former Soviet Union in Afghanistan, was seen as a principal architect of last years' ramped-up campaign of suicide attacks in Afghanistan. While Dadullah's death is seen as a significant success for the Afghan government of President Hamid Karzai and his American backers, analysts have predicted that al Qaeda and the Taliban may seek revenge by hitting targets in Afghanistan and Pakistan.
"Then I saw dust and smoke everywhere," Khan said. "People who were injured were crying and wailing."
Television footage showed the bloodied bodies of victims on stretchers being shoved into waiting ambulances.
Peshawar is the capital of North West Frontier Province, a region bordering Afghanistan where pro-Taliban militants are active. It has suffered periodic bomb attacks in recent years.
In January, a suicide bombing near a Shiite mosque killed 15 people and wounded more than 30, mostly police.
On April 28, a suicide attack on Pakistan's Interior Minister Aftab Khan Sherpao in the nearby town of Charsadda killed 28 people. Sherpao was slightly hurt in the blast, the latest in a series of top Pakistani officials to be targeted by militants.
Tuesday's blast could add to a sense of growing instability in Pakistan after a weekend of violence in the southern city of Karachi that left 41 dead. That unrest was linked to a political crisis sparked by President Gen. Pervez Musharraf's suspension of the country's top judge.