Health Ministry spokesman Saad al-Amili reportedly said at least 47 people were killed and 114 others wounded.
Officials are saying the blast was caused by at least two simultaneous car bombs. However, witnesses and police at the scene gave a different account, saying a missile had landed in the area, an Iraqi journalist told Aljazeera.
No vehicle could have entered the site as the area houses a police volunteer centre and vehicles are not allowed in the vicinity, he said.
The dead included civilians and police volunteers, he added.
As medical personnel attended to casualties, helicopters reportedly buzzed overhead.
Rescuers pulled bodies from mangled market stalls. The area was littered with shoes, clothes and body parts, as well as scattered fruit and vegetables from the market.
A huge crater had been punched in the road.
Angry crowds near the site of the blast denounced US forces and interim Iraqi Prime Minister Iyad Allawi's government for failing to protect police recruiting centres.
Rescuers pulled bodies from
mangled market stalls
"Such places were targeted before," said Ali Abu Amir, who was among those trying to join the force, but had gone around the corner to buy a drink when the explosion went off.
"I blame Iyad Allawi's government for what happened because they did not take the necessary security measures," he said.
Angry residents also condemned US President George Bush.
Just hours after the devastating blast, a roadside bomb exploded in central Baghdad on Tuesday afternoon, sending black smoke billowing into the sky.
A vehicle was damaged in the blast
The latest blast occurred at 1155 GMT at Khalani square in eastern Baghdad as three sports utility vehicles, popular with Westerners, passed by, said witness Thamir Jassim. One vehicle was ablaze while the other two managed to flee the scene.
There was no immediate word on casualties.
Iraqi analyst Dr Hani Ashur told Aljazeera he believed the attack was in reaction to the escalating use of force by the US army.
"The more violence is used, the more Iraqi citizens lose faith and trust in the future. Now, we have to make Iraqi citizens trust in the future. They need to see some light"
Dr Hani Ashur,
"Iraq should be turned into a negotiations field, rather than a conflict one," Ashur said following the first blast on Monday.
"This cannot be achieved unless all US military operations targeting Iraqis are halted."
Ashur warned that an escalation in conflict would "mean the elections may not take place on time".
He said the continuous use of force by US troops "encourages armed groups to carry out more operations in other areas believed to be more safe".
The ordinary Iraqi citizen, he added, is "naturally, the victim in all of this".
"US forces always say they want peaceful resistance rather than an armed one," he said. "But how can there be peaceful resistance if there is no suitable environment for Iraqi political parties and individuals, religious scholars and tribal leaders to express their points of view?
"The more violence is used, the more Iraqi citizens lose faith and trust in the future," Ashur cautioned. "Now, we have to make Iraqi citizens trust in the future. They need to see some light."