The blast occurred at Lahori Gate near Karbala Gamay Shah, a Shia `imambargah` or prayer hall.
Superintendent of Police (Security) Faisal Rana told the media that the attack was carried out by a suicide bomber.
"The attacker detonated his explosive vest at the first layer of security, where policemen were checking people (joining the procession)," Rana said.
The bomber struck when he was stopped by policemen, he added.
Lahore Police chief Aslam Tareen too said the attack was carried out by a suicide bomber and added that four policemen were among the seven dead.
State-run Rescue 1122 spokesman Fahim Jehanzeb told PTI that the blast occurred minutes before the Shia procession reach the spot.
A suspect was arrested from the site of the blast which also left nearly 40 people injured, other officials said.
Shia Muslims across Pakistan are observing the `chehlum` or 40th day of martyrdom of Hazrat Imam Hussain today and a large procession that originated from the old quarters of Lahore was to culminate at Karbala Gamay Shah in Bhatti Gate.
The attack occurred despite extensive security arrangements put in place across Lahore to protect Shia processions and the annual `urs` of the famous Data Darbar shrine.
An emergency was declared in all hospitals across Lahore following the blast.