The incident occurred in Manawala area of Sheikhupura when the car of an assistant sub-inspector and a constable collided with a tanker and caught fire.
A rickshaw carrying 10 school children was also set ablaze while passing on the same road, rescue workers said, resulting in the death of six students.
Shops in the surrounding area caught fire and pedestrians were sprayed with petroleum.
A rescue worker confirmed that 12 people have been killed and over 20 injured.
All the bodies have been burnt and some of them were burnt beyond recognition, rescue official Muhammad Azam said.
