It was the first serious violation of a ceasefire deal signed in February after three years of Muslim-Christian violence that left thousands dead.
The device exploded in a Christian-controlled part of the port city, in the eastern Moluccan islands.
Stones were thrown and police and troops fired warning shots over people's heads to disperse the crowd, which was angered by the explosion, witnesses said.
The bomb exploded late morning outside a karaoke bar on a central shopping street, close to the governor's office. One person died at the scene and three others in hospital or on the way to it, according to a hospital employee.
Some of those in hospital were said to be critically injured.
There were conflicting reports about the bomb. Some people said it was thrown from a speeding van while others said it exploded under a parked motor scooter.
"It was a powerful explosion," said one police officer. "The perpetrators obviously had training."
There were a number of minor bomb blasts in the Moluccas following the peace treaty. Senior government officials blamed the attacks on paramilitaries opposed to the deal.
Muslim militants belonging to the Laskar Jihad group have vowed to disrupt the peace process.
Weapons surrender
The Muslim-Christian violence broke out in 1999 - sparked by a minor traffic accident - and led to more than 5,000 deaths. Hundreds of thousands of people fled their homes.
The violence got worse in 2000 with the arrival of the Java-based Laskar Jihad. Under the February peace deal, there is to be an inquiry into the group's activities as well as into two Christian separatist groups.
Since the peace deal the region has been fairly calm, with both Muslim and Christian communities agreeing to hand over their weapons.
Muslims and Christians mingled freely for the first time in years after the accord, hugging each other and shaking hands.
The numbers of Christians and Muslims are almost evenly split in the Moluccas, while Indonesia as a whole is 85% Muslim.