The blast struck a market in Abu Dshir, a mainly Shia enclave in the predominantly Sunni district of Dora, in the south of the Iraqi capital. Several shops were reported to have been destroyed by the explosion and vehicles set on fire.
Dora had been known as an insurgent stronghold but analysts say security had improved in recent months.
Local police said that women and children were among the dead and injured.
Eyewitness Hussein Ali said the attacks was “a horrible catastrophe”.
“I believed that my wife was dead when she fell on the ground. I thought shrapnel hit her body, but later on I thanked God that she was unconscious,” he told the Associated Press.
Another witness said he believed the targeting of innocent people was a cowardly act and “against the will of God who created people”.
Earlier on Friday, one person was killed and 12 wounded when a bomb exploded close to a minibus in the same area of Baghdad, said police.
Violence in Iraq has declined steadily in recent months and is currently at a four-year low, although attacks are still a regular occurrence.
The latest attack comes a day after an MP from the bloc of Shia cleric Moqtada al-Sadr was killed by a roadside bomb.
Saleh al-Ogaili was the first MP to be killed in Iraq for 18 months.
Prime Minister Nouri Maliki said a high-level inquiry into the assassination was under way.
Also on Thursday, Abbas Khudair, the leader of an armed Sunni group working with US forces, was killed in a roadside bombing, along with two of his children and a nephew.
More than 47,000 civilians are now believed to have been killed in Baghdad since the US-led invasion of March 2003, according to the campaign group Iraq Body Count.