The bus was stopped, before passengers were ordered off and shot in the mountainous district of Kohistan as it travelled from Rawalpindi, the city where Pakistan's army is headquartered, to the northern city of Gilgit.
"Armed men hiding on both sides of the road attacked the bus," local police chief Mohammad Ilyas said.
"Eighteen people have died and eight wounded," he added.
The ambush happened near the town of Harban, 130 miles (208 kilometres) north of the capital Islamabad.
Survivors said seven or eight gunmen stopped the bus, forced the passengers to get off and then opened fire, regional administration chief Khalid Omarzai told AFP by telephone, confirming the casualty numbers.
"It appears to be a sectarian attack," local MP Abdul Sattar Khan said.
"Its a remote area. We are getting reports that the gunmen forced people to get off the bus. They checked their papers and shot them dead," he told AFP.
The victims were Shiite Muslims, he said. "It could be the outcome of the murder of two Sunni Muslims a few days ago in Gilgit. The people of the area had vowed they would take revenge," Khan added.
Human rights groups have heavily criticised the Pakistani government for failing to crackdown on sectarian violence between the country's majority Sunni and minority Shiite Muslim communities that has killed thousands.
Authorities were slow to confirm the motive and insisted Islamist militants are not active in the area. Kohistan borders the Swat valley, where Pakistan in 2009 managed to put down a two-year Taliban insurgency.
Omarzai told AFP that he could not immediately confirm whether it was a sectarian attack, saying that the police were investigating.
Three bombs have targeted Pakistan's northwest in recent days, raising fears that violence linked to a Taliban insurgency directed against a government allied to the US-led war against terror is again on the rise.
More than 530 bomb attacks have killed around 4,900 people across Pakistan since government troops in July 2007 stormed a mosque in Islamabad where Islamist extremists were holed up, provoking a local Taliban-led insurgency.