The attack left at least three people killed and seven injured, initial reports said.
The explosion damaged parts of the camp in Makhmur, southwest of Kurdish regional capital Erbil, said Makhmur mayor Rizgar Mustafa, according to Rudaw media network.
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It was initially reported that the explosion was a auto bomb attack, but the mayor said that an investigation is still underway and they do not yet know the cause of the explosion.
"A auto bomb exploded around 7:30 PM in the Shahid Rustum camp, two kilometres (one mile) east of the town of Makhmur, killing and wounding people", said the official from the Patriotic Union of Kurdistan (PUK).
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The camp is home to some 12,500 people from southeastern Turkey, supporters of the Kurdistan Workers' Party (PKK) which Turkey considers a terrorist group.
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