The death toll of the bombing attack on Sadr City, a district east of Baghdad, has risen to at least 50, hospital officials told dpa.
A car bomb went off on Wednesday morning inside a local marketplace in the Shiite-dominated district, injuring more than 120, the sources said.
The strong explosion occurred during the shoppers' rush hour in the market, causing severe damage to a number of residential buildings and stores in the area, witnesses told dpa.
The district is currently under tight security measures with police forces blocking the roads leading to the explosion site for fear that other blasts might happen, the witnesses added.
Islamic State claimed responsibility for the assault in a statement circulated on social media. It said the extremist group had carried out a car bomb targeting a gathering of Shiite militias in Sadr City in Baghdad.
The statement could not be independently verified by dpa.
Islamic State, which controls Sunni, Arab parts of northern and western Iraq, regards Shiite Muslims as heretics.