Videos posted on Twitter, purportedly from Chabahar, showed thick smoke rising from the area.
According to security officials, the explosion was caused by a vehicle bomb going off in front of the Police Headquarters in Chabahar, Sistan and Baluchestan province.
Terror attacks in Shiite Iran are rare, but militants have stepped up action in recent months. No militant group has immediately claimed responsibility for the attack.
Mohammad Hadi Marashi, deputy governor for security affairs, told state TV that two police officers were killed in the attack.
Chabahar city governor Rahmdel Bameri said many people were also wounded in the 10 am (0630 GMT) attack.
Ansar al-Furqan is known to operate in Iran's southeastern Sistan and Baluchistan Province, which sees occasional attacks by Baluch separatists and drug traffickers. A year ago, the group claimed to have blown up an oil pipeline in Iran's southern Khuzestan province.
Arab separatists and the Islamic State group both claimed responsibility for the attack.
Tehran often blames the United States, Saudi Arabia and Israel for backing groups to destabilize Iran, something its rivals deny.
Iran says armed groups have safe havens in Pakistan and has warned it will hit their bases there if Islamabad does not confront them.
"In 2010, our security services intercepted & captured extremists en route from UAE".
The Indian foreign ministry strongly condemned the "despicable terrorist attack".
According to early reports, explosion and shooting were heard in Iran's southeastern port Chabahar near the Pakistani border on Thursday morning, at 9:30 AM.
India is developing the Chabahar port along with Iran and Afghanistan.
Meanwhile, Iranian Foreign Minister Mohammad Javad Zarif claimed that those behind the attack were backed by foreign countries and would be brought to justice.
Such acts of violence will also "boost the Islamic Republic of Iran's resolve to fight terrorism", said Jahangiri, calling for all-out efforts to identify the perpetrators and bring them to justice.