Two people were killed and 40 others, including four army soldiers, wounded in a south Kashmir grenade explosion late on Saturday afternoon.

Police said militants lobbed a hand grenade when an army vehicle passed through the busy main market of Shopian town, 75 km from Srinagar in Pulwama district on Saturday afternoon.

"The grenade exploded near the passing vehicle of Rashtriya Rifles killing one civilian identified as Mohammad Yussuf Lone on the spot. Forty-one injured, including four army soldiers, have been removed to Shopian hospital for treatment," a senior police officer said in Srinagar.

"Attending doctors referred six critically wounded civilians and two army soldiers to Srinagar for specialised treatment," he added.

One of the injured later succumbed to his injuries in hospital.

The blast site was surrounded and searched by the security forces even though no one was arrested.

The explosion led to panic in the market with shopkeepers and shoppers running helter skelter for cover.