Two of them died on the spot while the third died at a local hospital.
More than six people were injured and five of them were said to be in very critical condition at Bir Hospital in the capital.
The three deceased are a senior lady and two men.
Police have cordoned off the explosion site in Babarmahal, a key location of government offices.
"We have arrested two suspects in relation to the blast, investigation into the incident is underway," Nepal Police spokesman Binod Singh said.
The explosion came three days after the Nepal Oil Corporation ( NOC) increased the prices of petroleum products in line with the ballooning fuel prices on the international market.
It has been reported that a meeting of Public Accounts Committee on fuel price hike was underway when the explosion took place.
Meanwhile, Samyukta Jatiya Mukti Morcha-Bishwokranti, a little known underground outfit, has claimed responsibility for the blast. The group had carried out an explosion at the mobile phone tower in Dhadhing recently.
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