The bombing took place in the city of Zahedan, located near the country's border with Afghanistan and Pakistan.
The deadly explosion occurred in the early morning hours.
Iran's official news agency (IRNA) quotes an eyewitness as saying that a car packed with explosives was placed in the path of a bus used to transport employees of Iran's Islamic Revolutionary Guards Corps.
Witnesses reportedly said that militants riding motorcycles shot at the bus to force it to stop. They add that the explosives inside the car appeared to have been detonated by remote control as the bus drew near.
Mahmud Barahuyinejad, an independent journalist in Zahedan, spoke to RFE/RL after visiting the scene of the explosion. "A car carrying a number of strong explosives exploded in front of a bus carrying members of the Revolutionary Guards,” he said. “From the remains of the car and the bus, it appears that it was a very [strong] explosion,” Barahuyinejad added.
A local military commander told the ISNA news agency that 11 people were killed and 31 were injured. Earlier reports had said that 18 people were killed in the bombing. An aid worker was quoted as saying that the severity of the explosion made it difficult to count the bodies.
It is not yet clear whether the victims are all members of the Revolutionary Guards.
Rescue workers clearing the scene of today's blast (Fars)
A senior official of Sistan and Baluchistan Province, Soltanali Mir, told IRNA that five suspects have been arrested. He said two of them were in possession of grenades and a video camera when police captured them with the help of citizens. Three others were arrested later, Mir says.
Iranian officials have condemned the attack as "terrorism," saying "rebels" were behind it. Fars news agency reports that a Sunni group calling itself Jundollah (Soldiers of God) is claiming responsibility for the attack.
In recent months the group has been blamed for a series of attacks and kidnappings. Iranian officials have in the past accused the group, led by Abdolmalek Rigi, of being involved in drug smuggling and of having ties to terrorist organizations.
Iran's Troubled Eastern Frontier
Zahedan is capital of the predominantly Sunni Sistan and Baluchistan Province, located near Iran's border with Pakistan and Afghanistan.
The area is a major route for drug traffickers and clashes between police forces and drug smugglers are regularly reported in the area. Independent journalist Barahujinejad says today's explosion has heightened security concerns in the province.
Earlier this month, on February 1, four members of the security forces were killed in Zahedan when armed men opened fire on their vehicle.
In December, one person was killed when a car bomb exploded in front of the provincial governor's office in the city. Radio Farda reported at the time that Jundollah had claimed responsibility for the explosion.