The explosives-laden car went off at the wholesale Jamila market in Baghdad's Shiite district of Sadr City, a police officer said. The explosion also wounded 28 other people, he added, saying the death toll was expected to rise further.
A medical official confirmed the casualty figures. Both officials spoke on condition of anonymity because they were not authorised to talk to journalists.
A plume of thick black smoke billowed from the area and people were running away in panic. At the site, twisted metal and shards of glass littered the pavement, along with vegetables and other goods sold at the market.
At least one soldier was seen being evacuated from the scene, which was sealed off by security forces.
More From This Section
The Islamic State group quickly claimed responsibility in an online statement on its media arms, the Aamaq news agency.
The Associated Press could not verify the authenticity of the statement. Sunni militants consider Shiites to be apostates and Shiite-dominated areas are prime targets for IS.
Yesterday, Iraqi military said it had "fully liberated" Tal Afar's town center from IS militants. Today, the troops fought at the outskirts of al-Ayadia district, about 10 kilometres northwest of Tal Afar, where most of the militants fled.
Tal Afar was one of the few remaining towns in Iraq still in IS hands following the liberation of Mosul in July from the Islamic State group. The Sunni militant group still controls the northern town of Hawija, as well as Qaim, Rawa and Ana, in western Iraq near the Syrian border.