The pre-dawn attack came six days after 30 worshippers were killed by a suicide bomber as they prayed in an Imambargah in Sialkot. Police had feared a revenge attack.
"It was a high intensity (car) bomb which carried seven to eight kilograms of explosives," Multan Police Chief Sikandar Hayat told AFP. It was set off by remote control or a timer.
The main Rasheedabad Square was littered with body parts, turbans and bloodstains, witnesses said.
There was blood, a charred engine of the car, metallic remains and a charred motorcycle, MLB-9064, at the scene of the incident. The engine number of the suspect car was spotted as PKB-116456, however, police did not rule out the possibility of tampered number. A thorough investigation would unveil facts, a senior police officer said.
Power supply to adjoining areas was also disconnected after the blast damaged a transformer.
Two nearby houses and four shops were also damaged by the impact of the blast that was heard by the people living in areas. Witnesses said they heard two blasts, one of low intensity, but a senior police officer said, they think only adjoining one device exploded and the low-intensity sound could have been produced by the transformer, or the burnt motorcycle.
Situation remained in control and normal in the city after the incident.
Meanwhile, District Nazim has appealed the people to remain calm and said that a meeting of Ulema from all schools of thought has been convened to ensure peace in the area.
He said the district government has also requested the army to remain alert so that their help could be sought when needed.
Forty people were killed, Imran Rafiq, the chief medical officer of the city's main hospital told AFP. More than 100 were injured and extra hospital staff were brought in to extract shrapnel from the wounded.
Local police officer Mohammad Nazakat said another person died in the hospital later, bringing the death toll to 41.
No one has claimed responsibility but Sunni leaders immediately blamed Shia extremists.
"This attack is carried out by Shias," Millat-e-Islamia leader Maulana Muhammad Ahmed Ludhianvi told AFP.
Shia leader Allama Syed Taqi Naqvi denied any hand in the blasts. "It is a terrorist act. No Shia was involved. Those killed were our brothers because they were Muslims."
Police have detained several people for questioning, Sikandar Hayat told AFP.
The prayer gathering in Rasheedabad Square had lasted the whole night and the crowd was beginning to disperse when the pre-dawn calm was shattered by the explosion.
Information Minister Sheikh Rashid condemned the attack as "an act of brutal terrorism".
Interior Minister Aftab Ahmed Khan Sherpao said authorities had deployed regular troops in the city to maintain order.
Outside the hospital victims' relatives chanted slogans against Shia and vowed revenge. Hundreds of police and paramilitary troops were deployed to guard mosques and religious schools in several cities to prevent follow-up violence.
Maulana Muhammad Ahmed Ludhianvi called a two-day mourning for Thursday and Friday.
Hundreds of people attended funeral prayers for 33 of the victims, held in a ground next to the hospital. Prayers for seven others, who were killed on the spot, were held elsewhere in the city. The bodies were transported to their hometowns for burial, police said.
Police had blamed Sipah-e-Sahaba and another outlawed Sunni group Lashkar-e-Jhangvi for Friday's attack in Sialkot.
Meanwhile, President General Pervez Musharraf and Prime Minister Shaukat Aziz have expressed their profound grief over the loss of precious lives in the Multan blast. They ordered an immediate probe into the tragic incident.
The president and prime minister expressed their sympathies with the bereaved families.
They asked the Multan administration to provide best possible medical facilities to those injured in the incident.