Iraq mourned its dead Saturday after one of the deadliest car bombs in its bloody history ripped through a busy market north of Baghdad and killed at least 90 people.

The suicide attack by the Islamic State (IS) jihadist group came as the country marked Eid al-Fitr, the feast that ends the Muslim fasting month of Ramadan.

Residents recounted scenes of horror in the aftermath of Friday's attack, in which officials said at least 15 children were among the dead.

Muthanna Saadoun, a municipal employee who drives a street sweeper, used his truck to help put out the fires that the blast caused in the market area.

"People were burning in their cars because no ambulances or fire engines were able to reach them," the 25-year-old said.

IS said the suicide attacker had three tonnes of explosives in his vehicle.

The blast left a huge crater in the main street of Khan Bani Saad, only 20 kilometres (12 miles) from Baghdad's northern outskirts, in Diyala province.

Cuts of charred meat were still hanging from the hooks of one butcher's stall that was ravaged by flames. Several collapsed buildings were still smouldering 12 hours after the attack.

A child's toy elephant lay in the middle of the street as a defence ministry bulldozer shovelled the debris and cleaners swept blood-stained water.

"What we witnessed yesterday cannot be described. Fire, bodies, wounded, women and children screaming... Khan is now a disaster zone," said Salem Abu Moqtada, 34, who sells vegetables in the market.

"The toll so far is 90 martyrs and 120 wounded, and we have between 17 and 20 missing," Abbas Hadi Saleh, the top official in Khan Bani Saad, which is predominantly Shiite but has a Sunni minority, told AFP.

Officials warned the definitive death toll could climb even higher after a day that saw bodies being retrieved from collapsed buildings while others were being buried.

- Sombre Eid -

"Every year (during Ramadan) there's a bombing. We are guilty of being Shiite," Saleh said. "This is the biggest in Diyala since 2003."

Sunni Muslims began marking Eid al-Fitr on Friday but Iraq's majority Shiite community started 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.

"We do not have an Eid," said Hussein Yassin Khidayyer, a 45-year-old shop owner. The force of the blast threw him to the back of his shop but he escaped unscathed.

"No one wished each other a happy holiday," he said.

Eid al-Fitr is one of the most important dates in the Islamic calendar and traditionally sees families gather to celebrate the end of a month during which many fast from dawn to dusk.

IS said the attack targeted Shiite militias, a claim it often makes even when most of the victims are civilians.

According to witnesses and officials, the bomb went off at a checkpoint guarding an entrance to the market.

Vehicles could be seen heading south from the town with coffins on their roofs taking some of the bombing's victims to be buried in the Shiite holy city of Najaf.

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 in June 2014.

The jihadists no longer have fixed positions in the province but have reverted to their old tactics of planting car bombs and carrying out suicide operations or hit-and-run attacks.

- 'Hunt them down' -

Prime Minister Haider al-Abadi condemned the attack as "a despicable crime by the "Daesh (IS) terrorist gangs".

"We are determined to hunt them down on the battlefield and in every corner of Iraq until we get rid of the last terrorist," he said in a statement.

Iraqi forces are currently pressing a broad offensive in Anbar, where they are tightening the noose on IS in the western province's two main cities, Ramadi and Fallujah.

The US military's top general, Martin Dempsey, made a brief visit to Iraq on Saturday and greeted his troops.

The thousands of US military advisors deployed across Iraq and the US jets leading an international coalition's air campaign against IS are playing a key part in efforts to retake Anbar.

"This latest attack is yet another painful example of the atrocities that the terrorist group ISIL (IS) continues to perpetrate against the people of Iraq," said US National Security Council spokesman Ned Price.

"The United States will continue to support the government of Iraq and its security forces to degrade and ultimately destroy this terrorist organisation."

Outrage and grief poured in from countries supporting Baghdad's war against IS, with the United Nations's top envoy in Iraq, Jan Kubis, calling the attack "outside all boundaries of civilised behaviour".

Russian President Vladimir Putin called it an "inhuman act of terrorism" while the British Foreign Office said it was a "heinous act".