The blast took place at 12:30 pm local time in Chok-e-Kunduz when a bomb that was placed on a bicycle exploded, killing three including Mr Arab and wounding sixteen others, Samiullah Qatra, police chief of Kunduz said.
No group including the Taliban has claimed responsibility for the blast.
Shir Mohammad Arab, who fought Russians in the 1980s, had turned into a peace activist trying to negotiate with the insurgents, official added.
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