The blast, the deadliest in Pakistan this year, came hours after U.S. Secretary of State Hillary Clinton arrived in Pakistan pledging a fresh start in ties with an increasingly embattled and sceptical partner in the struggle against Islamist militancy.

The Peshawar bomb went off in the busy Peepal Mandi market street in the old city, sparking a fire that engulfed several buildings.

"The figure is rising. We have more than 80 dead including women and children," Sahib Gul, a doctor at the city's main hospital, told Reuters.

Pakistan is on high alert amid fears of retaliatory strikes by Taliban militants as the army attacks their strongholds in South Waziristan on the Afghan border.

The blast was caused by a car bomb, a senior city official said.

"The car was parked outside a market frequented mostly by women," Azam Khan told Reuters.

The offensive against in South Waziristan came after a series of brazen attacks on the United Nations, army headquarters, police and general public, in which more than 150 people were killed. There have been several bomb attacks since the offensive began.

Wednesday's blast caused serious damage in the neighbourhood of old wood and brick buildings, busy streets and narrow lanes.

"Several buildings and a mosque have been badly damaged while a fire has engulfed a building," witness Aqueel-ur-Rehman told Reuters from the scene. "I can see three bodies lying under the debris," he said.

The army launched the offensive on Oct. 17 and says it is making steady progress as soldiers push towards the Al Qaeda-linked militants' bases in the region's rocky mountains and patchy forests.

Pakistani stock market investors have been unnerved by the violence in recent weeks and the main index was 0.69 percent lower at 9,251.84 points at 0955 GMT.

"Despite strong corporate results and good valuations, the deteriorating law and order situation is keeping fresh investment at bay," said Asad Iqbal, managing director at Ismail Iqbal Securities Ltd.