The slain was identified as a street vendor from India's Uttar Pradesh state. Police blamed the attack on insurgents fighting Indian rule.
"The attack, targeting roadside vendors, was carried out to discourage people from returning to normal life," said Haseeb Mughal, a police official.
The medics at the main hospital in Srinagar said they received 25 wounded.
Two doctors said two of the injured were brought to the hospital in critical condition with head injuries and were being operated on. The doctors spoke on condition of anonymity in keeping with government policy.
The attack comes a week after at least 20 people were wounded when militants lobbed a grenade at a bus stop in northwestern Sopore town. That attack was an apparent retaliation for New Delhi's stripping the disputed region of its semi-autonomous status in early August.
The August decision was accompanied by a harsh crackdown, with New Delhi sending tens of thousands of additional troops to the already heavily militarized region, imposing a sweeping curfew, arresting thousands and cutting virtually all communications.
Authorities have since eased restrictions, lifting roadblocks and restoring landlines and some cellphone services. They have encouraged students to return to school and businesses to reopen. But Kashmiris have largely stayed home, in defiance or fear amid threats of violence.
As the crackdown continues, Kashmiris have quietly refused to resume their normal lives, confounding India at their own economic expense.
For now, businesses in Kashmir are still largely shut. Many markets are only open for a few hours each morning.
In recent weeks, at least 10 non-local laborers and truck drivers have been killed by gunmen in separate incidents. Police have blamed militants for the killings.
Kashmir is divided between India and Pakistan but claimed by both in its entirety. The two countries have fought two wars over control of the region.
India accuses Pakistan of arming and training rebels who have been fighting for Kashmir's independence or its merger with Pakistan since 1989. Islamabad rejects India's charge and says it only provides moral and diplomatic support. About 70,000 people have been killed in the armed uprising and the ensuing Indian military crackdown.