The blast occurred near a market in the capital´s Shaab neighborhood, defense and interior ministry officials said, with a further 38 people wounded. Eyewitnesses described a scene of charred bodies and burnt-out vehicles.
Four children and three women were among the dead, according to officials at two local hospitals.
"I tried to escape and the fire was everywhere," said Umm Hatam, 45, who was heading home with groceries when the shock wave from the bomb knocked her off her feet.
"I saw the dead bodies of women and children, and about 10 small buses were burned," she said.
Karim Ibrahim, 40, an oil ministry worker, said "a large flame rose from the explosion, then I just found myself in the hospital."
"I was about 50 meters (yards) away from the explosion and I fainted because of my wounds," he said in Al-Kindy hospital of injuries to his shoulder and hand.
Shaab, a mixed neighborhood, is north of Sadr City, an overwhelmingly Shiite area.
The car bomb exploded on a main road just after midday. Although two security checkpoints were nearby, the site was not sealed off.
The blast came a day after a US military spokesman said attacks in Iraq had dropped to their lowest levels since the months following the 2003 invasion that toppled Saddam Hussein.
"Attacks are at their lowest since August 2003," Major General David Perkins said, adding that the number of incidents was down 90 percent from June 2007.
"There were 1,250 attacks a week at the height of the violence; now sometimes there are less than 100 a week," he said.
The Shaab bombing came three days after a suicide attack targeting Kurdish mourners in central Iraq killed 27 people and wounded 50 and an explosion on the outskirts of Baghdad killed another eight people.
Violence has eased in intensity since the end of 2007 -- with the US military stepping up anti-insurgency operations and Iraqi security forces being strengthened -- but deadly attacks still take place almost daily.
Also on Thursday, a bystander was killed and four electricity pylon repairmen were wounded when a roadside bomb engulfed the power workers´ vehicle in restive Kirkuk province, police said.
And in Jalawla -- the central Iraq town where Monday´s suicide attack on mourners took place -- an Imam was killed near his house by gunmen.
In 2007, a total of 17,430 Iraqis were killed, dropping to 6,772 last year. The casualty toll over the past three months was the lowest quarterly figure since the US-led invasion six years ago.
However, persistent bombings and suicide attacks have underscored concerns about security as the US military prepares to leave Iraq.
Two weeks ago, the White House denied that a spate of attacks was linked to President Barack Obama´s decision to withdraw most combat troops by August next year.
Near daily appeals from the Shiite-dominated government for national reconciliation have been rejected by Saddam loyalists, still flying the flag of the banned Baath party and pledging to fight on.
Under a US-Iraq security agreement signed in November, US troops will pull out of towns and cities by June 30 and from the whole country by the end of 2011.
In a speech last month, Obama ordered an end to US combat in Iraq by August 31 next year, but also said 50,000 US troops will remain under a new mission until the end of 2011.
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