A car bomb blast claimed by the Islamic State group ripped through the crowded heart of an Iraqi town north of Baghdad Friday, killing at least 35 people, officials said.

The attack occurred in a market area of the predominantly Shiite town of Khan Bani Saad as people shopped on the eve of the Eid al-Fitr holiday marking the end of Ramadan.

"We have 35 martyrs and more than 70 wounded," said Mohammed Jawad al-Hamadani, a member of the Diyala provincial council in which Khan Bani Saad is located.

"The explosion was big, it caused a lot of damage," Raad Fares al-Mas, a member of parliament, said from nearby Baquba, the capital of Diyala.

Many women and children were among the victims, the officials said.

Footage aired on Iraqi television showed devastation around the bomb site, with several buildings completely gutted by the blast and debris strewn over a huge area.

The wounded were being attended to on the street as residents walked about in the chaos holding their heads, imploring God and screaming in horror.

Sunni Muslims began marking Eid al-Fitr on Friday but Iraq's majority Shiite community will start their celebrations on Saturday.

Markets are usually packed in the days before the holiday as people preparing for large family gatherings shop for food and clothes.

The Islamic State group issued a claim on jihadist forums saying the blast was caused by a suicide car bomb, one of their biggest such attacks in months.

"Our brother Abu Ruqayya al-Ansari advanced with his car loaded with almost three tonnes of explosives in the middle of a gathering for Rafidha militias," the claim said.

Rafidha is a term IS uses disparagingly to refer to Shiite Muslims. The group often says its car bomb attacks target Shiite militia members even when mostly civilians are killed.

The office of Diyala Governor Muthanna al-Tamimi issued a statement declaring three days of mourning across the province and cancelling Eid al-Fitr festivities.

The Islamic State group also claimed a deadly car bomb attack that took place Tuesday in Khalis, another town in Diyala just 30 kilometres (18 miles) north of Khan Bani Saad.

Baghdad announced in January that Iraqi forces had "liberated" Diyala, significant parts of which had been overrun by IS after the jihadists launched a brutally effective offensive last June.

The jihadists no longer have fixed positions there but have reverted to their old tactics of planting car bombs, carrying out suicide operations or hit-and-run attacks. (AFP)