Those killed included both pilots operating the plane and an ordinary citizen.
The crash took place in Baldia Town's Yousuf Goth neighbourhood injuring at least eight on ground.
Witnesses said the plane had exploded mid-air and the rubble from the crash was spread far and wide.
Sajid Sadozai, a senior police official, said two buses parked at the terminal were destroyed while another was damaged. A number of nearby buildings also suffered structural damage.
TV footage showed plumes of black smoke rising from the site as rescue teams rushed in.
A PAF spokesman confirmed that both pilots flying the training jet had died in the crash, but could not give a cause for the incident.
Rescue teams and fire tenders had reached the site of the crash which took place near a bus terminal in the area.
The plane was described as a small fighter jet but its type is not yet known.