The blast in the Bayaa neighbourhood on Sunday left many bodies blown to pieces. A Reuters photographer at the scene saw body parts and human flesh on walls near the blast site.
US soldiers cordoned off the area as ambulances took the casualties to a nearby hospital.
Witnesses said a US convoy had passed nearby shortly before the explosion.
Meanwhile, fighting broke out between supporters of the Shia leader Muqtada al-Sadr and US troops in al-Sadr city.
Aljazeera’s correspondent in Baghdad reported that fighting broke out when US troops surrounded al-Sadr's office in al-Sadr city.
Iraqis rushed to save those
wounded in the explosion
In other developments, clashes broke out between Iraqi fighters and British troops in the southern city of Amara.
British helicopters fired on Iraqi fighters who were firing mortars, witnesses said. Four Iraqi civilians were killed, and several houses were destroyed.
The mortar fire at about 02:00 am targeted the governor's building, where British troops are located about 300km southeast of Baghdad. There was no immediate word on casualties.
Soon afterwards, British helicopters struck buildings in the city's al-Sadiq district, witnesses said.
"There were helicopters circling the area, then they started firing," said Subaih Hasan, standing in front of his demolished house. Hasan's brother was killed in the attack.
Also killed in nearby houses were an 8-month-old child, a man in his 60s and a fourth man. At least eight people were wounded, according to the families whose homes were hit.
British troops clashed with Iraqis
loyal to Shia leader al-Sadr
They blamed British air strikes for the destruction and deaths.
At least a dozen buildings were seen destroyed or damaged in the neighbourhood.
A British military spokesman said he had no immediate information on the violence in Amara.
The city was the scene of clashes on Saturday between British forces and fighters loyal to Shia leader Muqtada al-Sadr.
Aljazeera's correspondent in Basra, Yusuf al-Shuli, reported that British troops attacked in Basra were sweeping the Corniche al-Ashar area for explosive devices.
He added that the Governor of Basra city had sent a delegation of Shaikhs and representatives of political parties to meet Shaikh Abd Al-Sattar al-Bahadli, director of al-Sadr's office in the city.
Details of the meeting and are expected later in the day, but Shia groups and Iraqi police have been trying to prevent an all-out clash with British troops in the area.