Hospital sources in the town said at least 12 people were killed and five more wounded, listing women and children as among the victims.
But interim Prime Minister Iyad Allawi justified the decision to bomb the city on Tuesday, insisting that the two tonnes of explosive dropped had targeted a hideout for alleged supporters of al-Qaida-linked Abu Musab al-Zarqawi.
Allawi insisted the raid hit "terrorists" who "kill innocent Iraqis and destroy schools, police stations and hospitals with booby-trapped cars and jackets stuffed with explosives".
However, local residents did not accept the explanation.
"They talk about terrorists, but these are just families," said a man belonging to an angry crowd of locals who gathered at the lip of a large crater gouged by the blast.
The six bombs used in the air raid left little of the target. Many residents began to dig around the massive crater in search of more bodies following the attack.
Iraq's interim government has pledged to crack down on fighters, but Allawi cancelled a news conference on new security laws at short notice.
The government had earlier planned to unveil the legislation on Saturday.
Despite the delays, Foreign Minister Hushiar Zibari said the government would soon introduce the security law, reinstate the death penalty and offer a temporary amnesty to fighters.