Indian cities are on high alert as police hunt for those responsible for the blast in the northern holy city of Varanasi, which killed a one-year-old girl and wounded at least 34 people.
An Islamist militant group, the Indian Mujahideen, has sent an email saying it was behind the explosion.
Reports said that it was sent from a computer in a suburb of Mumbai, and that police had been sent to the area.
Two people were questioned about it and released later, reports said.
"We are taking the email seriously," D Singh, a senior police official of Uttar Pradesh state, where Varanasi is located, said.
Federal Home Minister P Chidambaram visited the site of the blast and spoke to local police officials.
Tuesday evening's incident happened when a small, improvised device hidden in a milk canister at a bathing point on the banks of the River Ganges near the Vishwanath temple exploded, police said.
The injured included Hindu worshippers attending an evening prayer ceremony.
The explosion occurred at about 1830 (1300 GMT) on Tuesday, and struck those attending the Ganga aarti prayer ceremony at the Shitla ghat - one of the many stone staircases which lead down to the Ganges.
The powerful explosion shook nearby buildings and knocked over iron railings around the Vishwanath temple. Stone walls up to 60m (200ft) away were damaged.
"There were people running everywhere and falling over each other. It was chaos," an eyewitness Ramlal Jaichand told a news channel.
The injured included two Italian nationals - a man and a woman.
A police spokesman said the girl who died had been sitting on her mother's lap when the bomb went off.
He added that her mother and two others were in serious condition in hospital.
The BBC's Chris Morris in Delhi says the only good news for the authorities is that the device used in Tuesday's incident - although deadly - was not particularly powerful.
In its email, the Indian Mujahideen speaks of revenge for the destruction by Hindu extremists on 6 December 1992 of the 16th Century Babri mosque in the northern Uttar Pradesh town of Ayodhya.
It also criticised a verdict by the high court in Lucknow that split the disputed land where the mosque used to stand between a Muslim group and two Hindu groups, and said it should not be rebuilt there.
The authorities are working to verify the authenticity of the message.
Varanasi is the religious capital of Hinduism and is usually packed with Indian pilgrims and foreign tourists.
Hindus believe that if a person is cremated in Varanasi, or the ashes of the dead are scattered in the river, the deceased will achieve release from sufferings of the cycle of birth and death.
The Ganga aarti, which takes place daily at sunrise and sunset on the Shitla, Dashashwamedh and Prayag ghats, is attended by 2,000 to 3,000 people, many of whom are foreigners.
Also known as Benares, the city - about 670km (415 miles) south-east of the Indian capital, Delhi - has a history of religious violence.
In 2006, 15 people were killed and dozens injured when bombs exploded at the Sankat Mochan temple and the main railway station.