Brigadier Qassim al-Musawi, an Iraqi armed forces spokesman, said about 4 million were in the city on Saturday to observe the birthday of Imam al-Mahdi al-Muntadhar, a 9th-century religious leader.
Authorities said 7,000 police, along with 2,000 Iraqi soldiers and 1,800 interior ministry commandos were securing the city, while interior ministry special forces were guarding its entrance.
The US-led coalition was providing air support for the security forces.
Many people walk to Karbala, 80km south of Baghdad, from across the country, and there have been several attacks against processions heading to the city.
Since the 2003 US-led invasion of Iraq, hundreds of people have been killed in attacks in Karbala, mostly involving suicide bombers.
In Baghdad, a car bomb struck a US military convoy, killing at least two passers-by and wounding five.
Police Lieutenant Ali Abbas said a parked car exploded in the city's eastern neighbourhood of al-Ghadeer, hitting a passing US military convoy.
US soldiers cordoned off the area around a burned-out Humvee, and there was no word on whether there were any US casualties.
Several blasts hit Baghdad
In a separate attack, a roadside bomb targeting a police foot patrol in east Baghdad wounded two policemen, while two Iraqi soldiers were wounded by another roadside bomb which had apparently been intended to strike a US-Iraqi convoy in the northern part of the capital, police said.
A bomb planted in a generator in central Baghdad also wounded two civilians, police said.
The Iraqi interior ministry announced that police had arrested a suspect planting a roadside bomb in the Dora neighbourhood and had found a bomb factory in a subsequent search of the man's house.
Iraqi police arrested a man and found 400 hand grenades and four bombs in his car in the al-Hamiyah area about 60km south of Baghdad, police said.
In the northern city of Kirkuk, 290km north of the capital, a roadside bomb killed three policemen and wounded 11.