The assailant, who was reportedly wearing army uniform, blew himself up among a group of soldiers at al-Sabin Square, near the presidential palace.
An al-Qaeda source told the BBC one of its members had carried out the attack.
It was the deadliest incident in the capital since President Abdrabbuh Mansour Hadi took power in February.
"We were in a parade, suddenly there was a huge explosion. Dozens of our men were killed. We tried to help them," Col Amin al-Alghabati told the Reuters news agency.
"The suicide bomber was dressed in a military uniform. He had a belt of explosives underneath," he added.
Another soldier, Ahmed Sobhi, told the Associated Press: "This is a real massacre. There are piles of torn body parts, limbs and heads. This is unbelievable."
Medical sources told the AFP news agency that at least 96 soldiers had been killed and 300 wounded, who they said were being treated in seven hospital across Sanaa.
It is not clear if the attacker had been taking part in the drill or had walked up to the soldiers shortly before detonating his bomb.
But the attack happened shortly before Defence Minister Nasser Ahmed and the army chief-of-staff were expected to greet the troops, officials said. Neither was injured.
Most of the casualties were from the Central Security Organisation, a paramilitary force commanded by Yahya Saleh, a nephew of former President Ali Abdullah Saleh.
They had been practising for a parade for National Unity Day on Tuesday, which marks the anniversary of the 1990 unification of the Marxist People's Democratic Republic of Yemen - also known as South Yemen - and the Yemen Arab Republic, known as North Yemen.
"Yemenis must stand together in the face of this deadly terrorist threat," Brig Karim Nahil said. "We will celebrate our unity tomorrow with the blood of our martyrs on our hands and faces."
Army offensive
Monday's attack comes 10 days after the military launched an offensive against Islamist militants linked to al-Qaeda in the Arabian Peninsula (AQAP) in the southern province of Abyan.
Over the weekend, at least 33 militants and 19 soldiers were reportedly killed in clashes near the town of Jaar, in Abyan, which has been under control of Ansar al-Sharia - an offshoot of AQAP - since last year.
On Sunday, a US Coast Guard instructor was shot and wounded by unidentified gunmen as he drove through the eastern Red Sea port of Hodeida. Ansar al-Sharia later said it had been behind the attack.
Ansar al-Sharia, or Partisans of Islamic Law, was founded in response to the growing youth movement in Yemen, which has marginalised Salafi jihadists who advocate the violent overthrow of the government.
In November, protesters forced President Saleh to hand over power to Mr Hadi, then his vice-president, as part of a deal brokered by the Gulf Co-operation Council.
Mr Hadi was elected president in February and immediately said one of his most important tasks was the "continuation of war against al-Qaeda as a religious and national duty".
The president has also moved to restructure the military, trying to purge it it of those closest to his predecessor.
Source: BBC News
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