A car bomb exploded Wednesday in Kashmir's main city, killing at least two people and injuring 90 in an audacious terrorist strike that could set back India's peace efforts with Islamic separatist insurgents. News reports put the death toll at four.

The morning rush-hour blast occurred in Lal Chowk, the main business district of Srinagar and close to Dal Lake, a tourist landmark of Jammu-Kashmir state. Gunfire was heard soon after the explosion but it was not clear who was firing at whom.

"I was in a bus. There was a bang and the bus windows shattered, Everything was flying in the air ... pieces of flesh and body parts came and hit the bus," said Munira Nazir, a 53-year-old school teacher.

A little known Pakistan-based rebel group, Al-Arifeen (The Pious), claimed responsibility for the blast in a telephone call to a local news agency. Islamic militants who have been fighting for independence or merger with neighboring Pakistan since 1989. More than 65,000 people have been killed in the violence.

Pandemonium broke out in the streets after the blast, which came from a hatchback car outside the corporate headquarters of the state-owned Jammu-Kashmir bank. People ran in all directions, cars rammed into each other as they tried to get away. The blast blew leaves off the trees along the street, carpeting it with orange color.

The street and pavements were covered with glass pieces and shrapnel from shattered cars and buses. Several women wailed and beat their chests, looking for missing relatives. Debris of cars, motorcycles and bicycles was strewn around.

Deputy Inspector General of Police H.K. Lohia said two people were killed but local television stations said four were killed.

At least 50 people were injured from flying glass inside the bank, a bank official, Nazir Ahmed, said. Lohia said 40 were injured outside, including pedestrians, bank employees, soldiers and a state lawmaker, Usman Majid, who was driving past the bank at the time.

Majid was the likely target of the attack. A former counterinsurgency expert, he had assisted security forces in anti-militant operations before joining politics.

Lohia said the bomb was fashioned from a land mine placed in a car.

It was the most devastating terrorist strike in Srinagar this year. A similar car bombing, but of lesser intensity, took place in July, also in Lal Chowk, although the final death toll was six.

The blast could deal a blow to the peace process between the Indian government and the All Parties Hurriyat Conference, an umbrella body of separatist groups. However, many armed Kashmiri groups, some based in neighboring Pakistan, are opposed to peace with India, and have generally escalated violence every time the two sides get closer.