At least 10 civilians were killed and 38 others wounded as suspected Taliban militants fired three rockets into the Landi Kotal town in the Khyber province not far from the Afghan border late on Thursday.
Landi Kotal lies on a strategic highway that connects the Peshawar to Afghanistan and is used by US and NATO convoys to ferry supplies into landlocked Afghanistan.
One of the rockets aimed at a nearby paramilitary base, missed target and hit the local bazaar where all the deaths and injuries happened.
The shelling, according to a post on the BBC website, came as militants attacked the paramilitary camp with automatic weapons and rocket propelled grenades, a heavy exchange of fire is reported to have taken place.
Clashes have continued between security forces and the militants that indulged in arson and bloodshed against the army efforts to push them out of Peshawar and away from key road routes.
Correspondents on Friday said that security forces were conducting intensive combing the area for the militants responsible for the gruesome attack.
(With inputs from BBC and Al Jazeera)