Police say the device was hidden in a motorcycle and detonated outside a busy morning market in the provincial town of Narathiwat.
It was in an area considered to be a "safe zone", with a high security presence.
On Thursday the Thai Government agreed to hold talks with Barisan Revolusi Nasional, part of a network of insurgent groups in the Muslim-majority south where clashes have claimed more than 5,500 lives in the past eight years.
Police say Friday's blast could be the work of a rival group responding with violence to the news of the BRN discussions.
"We are convinced that this incident was the work of militants wanting to show their power and to discredit the government," Somchai Panomuppakarn, deputy chief investigator of Narathiwat city police, told AFP.
But Thai Prime Minister Yingluck Shinawatra dismissed the suggestions, saying a reduction in attacks would take time.
"These bombings are usual, it was not in retaliation against the government. The signing yesterday does not mean that the violence will stop immediately," she said.
A 66-year-old man was in a critical condition with shrapnel wounds and facial burns following the blast, which also injured four women and a soldier.
A stubborn insurgency seeking greater autonomy has raged across several provinces in the south of Thailand bordering Malaysia for nine years - with near-daily shootings and bombings.
Malaysia's Prime Minister Najib Razak on Thursday said his country would host the Thai talks in Kuala Lumpur in two weeks.