KHAN SAAD: Rescuers in the Iraqi town of Khan Bani Saad were searching collapsed buildings for bodies Saturday after a car bomb ripped through a busy market, killing at least 90 people.

The suicide attack by the Islamic State group was one of the deadliest since it took over swathes of Iraq last year and came as the country marked Eidul Fitr, the Muslim festival that ends the fasting month of Ramazan.

Residents recounted scenes of horror in the aftermath of the attack, in which officials said at least 15 children were killed.

Muthanna Saadoun, a municipal employee whose work is to drive a street sweeper, used his truck to help put out the fires that the huge 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 crater the explosion left in the main street of the town's central Khan neighbourhood was 16 feet wide and more than six feet deep.

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.

“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, told AFP.

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

Khan Bani Saad is only 20 kilometres away from Baghdad's northern outskirts and lies in Diyala province. Eidul 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 in its claim that the attack targeted Shiite militias, a claim it often makes even when most of the victims are civilians.

According to witnesses and officials in Khan Bani Saad, the car 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 the bombing's victims to be buried in the city of Najaf.

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

The IS militants 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.

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.