A further 24 people were injured in the 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.
Iraqi puppet "state" television has reported that the leader of Ansar al-Sunna, a group with links to al-Qaeda in Iraq, has 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.
Documents and assault rifles were seized with the three men.
The US occupation commander in Baghdad has said that puppet pro-american "Iraqi soldiers" are refusing to leave other parts of the country to serve in the capital.
"I would tell you I need more Iraqi security forces," Major-General James Thurman said.
Six puppet "Iraqi army" battalions - roughly 500 "soldiers" each - that he has requested to reinforce Baghdad have not been provided by the puppet "Iraqi government", because the troops do not want to go to the city.
"Baghdad's security hinges on the capabilities of the Iraqi security forces," Thurman said, arguing against moving more US troops to Baghdad.
Agencies
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