"Bombardment targeted the Fadhiyya district at 1:00 am," Sheikh Mohammad al-Janabi, a tribal chief from Jurf al-Sakhr, a town 60 kilometres from Baghdad, said.
Janabi said two women and a child were among the dead, a toll confirmed by a doctor at the main hospital in nearby Iskandariyah.
Both said that 12 people were also wounded and that some of them were transferred to the insurgent stronghold of Fallujah in the neighbouring province of Anbar.
A lieutenant in the Iraqi army said "the Iraqi forces used a variety of weapons to target insurgent bases in Jurf al-Sakhr overnight".
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The mainly Sunni town, which lies in the north of Babil province, is the scene of almost daily fighting between pro-government forces and Sunni militants.
Islamic State jihadists launched a sweeping offensive in northern Iraq on June 9, conquering the second city Mosul and large parts of the country's Sunni heartland.
The army and allied Shiite militia such Asaib Ahl al-Haq take up positions in the town during the day but often pull back at night, which allows insurgents to plant roadside bombs.
The loss of Jurf al-Sakhr would threaten government control over one of only two main roads linking Baghdad to the southern Shiite heartland, including the holy cities of Karbala and Najaf.