Videos posted online by Iranian news agencies, purportedly from Chabahar, showed thick smoke rising in the area after the blast. There was no immediate claim of responsibility.
The southeastern port city in Iran's Sistan and Balochestan province is located near the border with Pakistan.
At least two people were killed and several wounded outside police headquarters in the port city of Chabahar when a suicide bomber blew up a auto.
Iran Foreign Minister Mohammad Javad Zarif condemned the attack and warned "terrorists" that they will be punished.
The suicide attacker, driving a vehicle loaded with explosives, drove up to the police headquarters, according to General Mohammad Pakpour of the Islamic Revolutionary Guard Corps.
"As we've made clear in the past, such crimes won't go unpunished: In 2010, our security services intercepted & captured extremists en route from UAE", Zarif said in what appeared to be a reference to the 2010 capture of Sunni insurgent leader Abdolmalek Rigi.
Meanwhile, Rahmdel Bameri, caretaker of the Governor's Office in Chabahar County, underlined the strategic significance of the city as a free trade zone, which has a deep-water port on the Sea of Oman.
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"Iran will bring terrorists and their masters to justice", he wrote on Twitter.
Chabahar is also the site of a port complex, which is being developed in cooperation with India as part of a new transportation corridor for landlocked Afghanistan.
Authorities did not identify who was behind the attack, but Iranian media initially blamed the attack on Ansar al-Furqan, a Sunni jihadi group.
The attack comes as Iran's economy reels in the wake of the United States re-imposing sanctions lifted by Tehran's nuclear deal with world powers.
That attack was claimed by a Sunni Muslim group called, Jundallah, also known as Soldiers of God. "There can be no justification for any act of terror", an MEA statement said.
"Foreign-backed terrorists kill & wound innocents in Chabahar".
While rare, Iran has been targeted by armed groups in recent years.