A further 36 people were injured in Saturday's explosion which happened near a petrol station in the predominantly Shia area of the Iraqi capital.
A bomb was hidden in a small barrel near a kerosene tanker where scores of people were waiting to buy fuel, police said. When the bomb went off it ignited the kerosene tanker.
The blast came as Iraq's Sunni Muslims observed the first day of Ramadan. US officials say they expect an increase in sectarian violence during the coming month.
Iraq's Shia religious leaders are yet to announce when they will start to observe their fast.
A group called Jamaat Jund al-Sahaba, Soldiers of the Prophet's Companions, has claimed it carried out the attack.
"This operation comes in reaction to the crimes of the [Shia] Mahdi Army against our Sunni kin in Baghdad," the group said in a statement posted on the internet.
Many people were waiting to buy
fuel when the bomb exploded
"We tell the hateful rejectionists [Shias] that our swords can reach the depth of your areas, so stop killing unarmed Sunnis and stop siding with the crusaders".
Earlier in September, the same group claimed responsibility for a series of attacks in Baghdad which killed 50 people.
In another grisly development, nine severed heads of policemen were found on Saturday in the central Iraqi city of Tikrit, the hometown of Saddam Hussein, a police officer said.
Two boxes containing the heads were tossed out of a speeding car in the centre of Tikrit, the capital of Salaheddin province, the officer said. Decapitation is a signature of extremist Islamist groups like al-Qaeda.
Meanwhile, Iraqi state television reported that the leader of Ansar al-Sunna, a group with links to al-Qaeda in Iraq, had been captured along with two of his aides.
Muntasir al-Jibouri was arrested in the town of Muqdadiya, about 80km northeast of Baghdad, in the troubled province of Diyala, the report said.
Ansar al-Sunna says it has carried out numerous attacks including car bombings as well as the beheadings of Shia and Kurdish hostages.
Documents and assault rifles were seized with the three men.