The blast at the Jamia Islamia Miftahul Uloom in Satellite Town area took place around 3 p.m. when a large number of people gathered for the annual degree and prize distribution ceremony, Deputy Inspector General Qazi Abdul Wahid was quoted as saying by Geo News.
Wahid said an unidentified militant had hidden explosive materials inside flower garlands brought for the ceremony.
The militant, however, failed to enter the seminary building because of tight security measures and parked his explosives-laden bicycle outside the main gate.
The children who died in the blast were aged between six and eight years.
Another senior police officer, Mir Zubair told Xinhua the blast was triggered by a timed device. At least six kg of explosives were used.
Local media said the seminary belonged to Sunni Muslims and the attack could be a result of sectarian confrontation between Sunnis and Shias.
No one claimed responsibility for the attack.