Television footage showed the husks of damaged vehicles littering the pavement near the shrine as first responders rushed to the scene, while security forces fanned out to launch a search operation and secure the area.
The shrine has been targeted previously, in a 2010 suicide attack that killed more than 40 people, and is guarded by heavy security. The nature and exact target of the explosion is yet to be ascertained.
Hundreds of pilgrims were at the Data Darbar site as the country marks the holy month of Ramadan.
Police said they were investigating whether the blast was caused by an improvised explosive device (IED) or a suicide bomber.
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Pakistani police confirmed the deaths and said the attack wounded several people.
"Those who carry out terrorist attacks on Sufi shrines are certainly not Muslims", he said while adding that such "anti-Pakistan" elements should not be tolerated.
According to Shahbaz Gill, spokesperson for chief minister Punjab, the suicide bomber was 15-years-old. In a statement, the group said the attack targeted police and had been timed to avoid civilian casualties. "The injured will receive the best care available".
Militant violence has declined sharply in Pakistan following a sustained crackdown in recent years and over the past two years Lahore, Pakistan's second-largest city, has been free of the kind of attacks that were once common.
The complex contains the shrine of Syed Ali bin-Osman Al-Hajvery, widely known as Data Ganj Bakhsh, an 11th century Sufi preacher originally from Ghazni in what is now Afghanistan.