The blast took place late Saturday in a building listed as an orphanage in the town of Depok, in the outskirts of Jakarta, national police spokesman Anang Iskandar said in a text message.
“Three people were injured, one seriously, in the explosion,” he said, adding that the severely-injured male victim had a broken arm and burns covering around 50 to 70 percent of his body.
Among materials seized from the house were grenades, detonators and potassium chlorate, Iskandar said.
Jakarta police spokesman Rikwanto said the orphanage “might be used as a facade to hide their terrorist activities”.
Two suspects fled the scene, an eyewitness told police.
Rikwanto said police were investigating if this blast was related to previous incidents linked to terrorism. Last week, police discovered explosive materials in a house that partially caught fire in West Jakarta.
“We believe these terrorists were preparing bombs in the house. We are investigating if they are from the same group,” he told AFP.
“The explosive materials found in the latest blast were similar to those found in West Jakarta,” he added.
Dozens of armed security personnel, including from the anti-terror police and bomb squad, on Sunday guarded the single-storey concrete house and blocked the main road, according to an AFP photographer at the scene.
Part of the roof collapsed and the windows were shattered, she said.
Residents recalled hearing a “sound like thunder” and seeing black smoke billowing from the house during the blast.
“The explosion was so loud, it sounded like thunder. People shouted “Bomb, bomb!” and we all ran as fast as we could. I was so scared that I kept tripping as I was running,” drinks seller Joko, who like many Indonesians goes by only one name, told AFP.
“I hope the police will catch the perpetrators soon. I feel unsafe staying here,” the 62-year-old said.
Earlier this month, a shootout in Solo in central Java left two terrorist suspects and an anti-terror officer dead.
Muslim-majority Indonesia has waged a crackdown on militant groups over the past decade with anti-terror police claiming the scalps of some of the country’s most notorious terrorist suspects in bloody raids.
Over the last decade, Indonesia has suffered a series of attacks by Jemaah Islamiyah — blamed for the Bali bombings in 2002 that left 202 dead — but has seen no major incidents since the bombings of two hotels in Jakarta in 2009.
The country has seen a shift to smaller terror cells, however, which attempted two suicide bombings on a church and police mosque in 2011 with explosives made from nails and bolts, killing only the bombers themselves.