No group has so far claimed the attack.
Wahid Mujro, a spokesman for the Health Ministry, said 15 wounded were treated at Kabul hospitals.
Afghan President Ashraf Ghani condemned the "barbaric attack" in a statement, calling it an "inhumane" act.
The deadly attack comes a week after 41 people were killed and 84 others injured in an IS attack that targeted Shiites in Kabul.More news: Questions About US Aid to Pakistan Put Focus on Military's Spending
Witnesses told RFE/RL that the blast could be heard throughout the capital.
Afghan police say the death toll from the previous night's suicide attack in Kabul has jumped to 20, with another 27 policemen wounded.
Isis' latest onslaught marks a sharp escalation of such attacks even as the Afghan Taliban, which fiercely competes for more influence, has also stepped its offensive in the war-torn country.
Tolo News reported that local residents had participated in a street demonstration in the area earlier in the day.More news: Games Of Thrones Season 8 In Coming In 2019
In December alone, IS claimed three attacks that killed dozens of civilians.
Kabul police spokesman Basir Mujahid said police were conducting operations against illegal drug and alcohol sales in the area and that security personnel were attempting to maintain safety among crowds that had gathered.
The security situation in Afghanistan continues to deteriorate.More news: New Justin Timberlake album coming February 2 ahead of Super Bowl performance