Lahore police chief Ghazanfar Ali said the bombing appeared to target police officers outside the shrine, known as Data Darbar, where Sufi saint Ali Hajveri is buried.
Footage shows a damaged police vehicle which has been badly burned.
Prime Minister Imran Khan and President Arif Alvi condemned the attack. More updates are awaited.
According to the reports, the blast hit the police vehicle, which was present for the Data Darbar, a famous shrine in the provincial capital of the eastern Punjab province.
Rescue teams have responded to the explosion and the injured have been taken to a nearby hospital.
"God willing, the security forces with the cooperation of whole nation will defeat these terrorists", he added.
Police have cordoned off the area and are ascertaining the nature of the blast.
A doctor at Mayo Hospital where the dead and injured were shifted said ball bearings were also used in the explosion which seemed to be carried out by a suicide bomber.
However, officials warned that the attack highlighted the need for vigilance by people gathering for worship during Ramadan.
The attack was claimed by the Hizbul Ahrar, a splinter group of the Pakistani Taliban, who said they were targeting the police.
In 2010, two suicide bombers detonated their explosive vests outside the shrine, killing close to 50 people.
Police said a general security alert was in force but there had been no specific warning about a threat to the Data Darbar, which protected by heavy layers of security.
According to the DIG Operations Ashfaq Khan, some 306 police officials in the city have lost their lives in the line of duty.
The shrine - located inside the walled city of Lahore, Pakistan's second-biggest city - is visited by hundreds of thousands of people each year from both Sunni and Shia traditions of Islam.
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