The incident took place when Iran's military was conducting tests for its drone and attack systems in a desert region before the projectile experienced a technical problem.
The projectile "disintegrated and its parts fell on the city of Gorgan", the provincial capital of the northern Golestan province, defence ministry spokesman Reza Talaei-Nik said.
"Two people were wounded," ISNA news agency reported, quoting provincial official Ali Mohajer.
The type of projectile was not immediately clear, with some local media reporting it to be a drone while others said it was a missile.
Local media shared footage showing the cordoned off area where the debris had fallen, with some shops in the vicinity having sustained heavy damage.
In Gorgan, which has a population of about 350,000 people, residents said they heard a loud noise when parts of the debris hit one of the city's main streets.
Iran, which has for years been under crippling US and Western sanctions, has developed a vast domestic arms industry, with a large arsenal of missiles and drones.
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