Feb 16, 2007
Police sealed off the area and exchanged fire with the attackers after a bomb went off, Irna news agency quoted an unnamed official as saying.
It comes two days after a car bomb in Zahedan killed 11 Revolutionary Guards.
A hardline Sunni group, Jundallah, said it carried out Wednesday's attack.
Iranian officials have accused Britain and the United States of supporting ethnic minority rebels operating in the Islamic republic's sensitive border areas.
The explosion and clashes took place just hours after the funerals for the 11 Revolutionary Guards.
The governor of Zahedan, Hassan ali Nouri, told Fars news agency that the explosion was caused by a percussion bomb - a device which produces a large bang but causes little damage.
Provincial police commander Gen Mohammad Ghaffari told Fars that 68 people had been arrested over Wednesday's bombing, including three who are suspected of having carried out the attack.
"The gang has been ordered by some foreign states to plant bombs in specific places and escape the country simultaneously," Gen Ghaffari said.
He added that police had found a number of weapons and explosives in a house "where members of the terrorist group Jundallah were getting prepared for another operation".
Zahedan is the capital of Sistan-Baluchestan province, which borders both Afghanistan and Pakistan.
It has a substantial Sunni Islam Baluch community.
The city has been the focus of low-level unrest, with several security force members being killed in the last two months.
Police have sometimes clashed with gangs transporting opium from Afghanistan.