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 authorized 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.
"It was a thunderous explosion," said Hussein Kadhim, a 35-year old porter and father of three who was wounded in his right leg. "It sounds that the security situation is still uncontrollable and I'm afraid that such bombings will make a comeback."
At least one soldier was seen being evacuated from the scene, which was sealed off by security forces.
The Daesh terror 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.
The bombing came as U.S.-backed Iraqi forces are in final stages of recapturing the northern town of Tal Afar from Daesh, about 150 kilometers (93 miles) from Syria's border.
On Sunday, Iraqi military said it had "fully liberated" Tal Afar's town center from Daesh terrorists. On Monday, the troops fought at the outskirts of al-Ayadia district, about 10 kilometers (6 miles) northwest of Tal Afar, where most of the militants fled.
Tal Afar was one of the few remaining towns in Iraq still in Daesh hands following the liberation of Mosul in July from the terror group. The terrorists still control the northern town of Hawija, as well as Qaim, Rawa and Ana, in western Iraq near the Syrian border.