The three Iraqis were killed on Monday at Baghdad’s gun market when US soldiers mistook gunfire of customers testing weapons for an attack.
According to Iraqi police, the dead included an 11-year-old boy, while four others were also wounded.
Elsewhere, a US military spokesman said two US soldiers were killed in separate attacks early on Monday near the town of Balad, about 100km north of Baghdad.
The spokesman said one of the soldiers was killed and two were wounded when they were ambushed with rocket-propelled grenade and small arms fire at 7:40am (04:40 GMT).
The apparently mistaken shooting of civilians began when a group of Iraqis were testing a gun in the market by firing it in the air, said Major Ali Rykan of the Iraqi police. As they shot, four US armoured cars passed by, Rykan said.
At least two US soldiers opened fire on the market, killing the three, said Rykan and Hashim Naim Muhammad, a witness. His 11-year-old nephew, Akil Husayn Naim, was among the dead.
The shooting took place at the Mraydi market, a three-kilometre-long market that is famous in Baghdad as a place where one can buy guns.
In Iraq, it is legal for a family to own one gun for self-defence.
Saddam aide blamed
In other developments, the US army said it had new evidence that Izzat Ibrahim, a key deputy of Saddam Hussein, was behind some deadly attacks on American forces.
Izzat Ibrahim is number six on
“We are getting more intelligence that suggests he was directly implicated in the killing of some coalition soldiers,” spokesman Brigadier General Mark Kimmitt told a news conference in Baghdad.
Ibrahim is number six on the US list of the 55 most-wanted Iraqi fugitives. He is the most senior figure still on the run, aside from Saddam himself.
Asked if US forces were getting closer to catching Ibrahim, Kimmitt said: “We are getting closer every day.”