Police were alerted to the incident at 23:30 local time (16:30 GMT) on Friday.
In a statement, the Umphang rescue team said the explosive was thrown and landed at the foot of an outdoor stage where people had been dancing.
Some of the wounded were taken to a nearby hospital, it added.
Several reports suggest the blast was caused by an improvised explosive device (IED).
Footage said to be from the scene, posted on social media, shows scenes of panic as emergency workers and festivalgoers tend to the wounded.
One video appears to show at least two people lying in close proximity being given CPR, as crowds rush around them in a state of confusion.
The camera then pans to a person cutting the trousers off a man to reveal a wound on his leg pouring out blood.
Images taken in the aftermath, shared by the rescue team, show a cordon in place around an area strewn with rubbish and strung with lights.
Prime Minister Paetongtarn Shinawatra shared her condolences to the families of those killed and injured in the bombing in a post on X.
She said she had ordered the police and security agencies to investigate the cause of the explosion and help those affected. She also directed an increase in police officers to oversee all festival events.
According to the Bangkok Post, between 8,000 and 9,000 people attended the week-long festival this year, and the attack took place on the penultimate night of the event.
Umphang is the southernmost district in Thailand’s northern Tak province, which shares a border with Myanmar to the west.