A suicide truck bomb killed at least 73 people, most of them Iranian Shia pilgrims, at a gas station in the city of Hilla 100 kilometres south of Baghdad on Thursday, police and medical sources said.

Other sources put the death toll as high as 100.

Islamic State, the ultra hardline Sunni militant group that considers all Shia to be apostates, claimed responsibility the attack in an online statement.

The pilgrims were en route back to Iran from the Iraqi Shia holy city of Kerbala, where they had commemorated Arbaeen, the 40th day of mourning for the killing of Imam Hussein, a grandson of the Prophet Mohammad, in the 7th century AD, the medical sources said.

The gas station has a restaurant in its premises that is popular with travellers. Five pilgrim buses were torched by the force of the blast from the explosives-laden truck, a police official said.

Meanwhile, Iraqi Kurdish and Shia forces agreed to co-ordinate movements after cutting off Mosul from the rest of the territory held by Islamic State in western Iraq and Syria in support of a U.S-backed offensive to capture the city, U.S. and Iraqi officials said on Thursday.

The agreement between the Kurds and the Shi'ite groups was reached at meeting on Wednesday between commanders of Kurdish Peshmerga forces deployed in Sinjar, west of Mosul, and Hadi al-Amiri, the leader of the Iranian-backed Badr Organisation.

Circling Mosul

Badr is the biggest component of the paramilitary coalition known as Popular Mobilisation, or Hashid Shaabi, which deployed southwest of Mosul to complete the encirclement of Islamic State's last major city stronghold in Iraq.

Mosul was already ringed to the north, south and east by Iraqi government forces and the Peshmerga.

Iraq's U.S.-trained Counter Terrorism Service units breached ISIS defences in east Mosul at the end of October and are fighting to expand their foothold there.

The offensive started on Oct. 17 with air and ground support from a U.S.-led coalition. It is turning into the most complex campaign in Iraq since the 2003 invasion that toppled Saddam Hussein, a Sunni, and empowered the nation's Shia majority.

Al-Amiri "came in order to co-ordinate with us," said Mahma Xelil, the mayor of Sinjar, a city where ISIS committed its worst atrocities after taking over the region two years ago, killing and enslaving thousands from the Yazidi minority.

Controlling the road will make it easier for the Iraqi army to enter Tal Afar, Xelil said. "There must be co-operation between us to prevent ISIS from moving their equipment and their fighters," he added, referring to Islamic State.

Sinjar was recaptured a year ago by the Peshmerga, forces of the Kurdistan Regional Government of northern Iraq. It lies west of Tal Afar, another stronghold of Islamic State, 60 kilometres west of Mosul.

Reducing movement of ISIS

Another Iranian-backed group, Kata'ib Hezbollah also met with the Peshmerga, according to the TV station of the organization. Iraqi Prime Minister Haider al-Abadi on Thursday Popular Mobilisation leaders on Thursday at the Tal Afar air base, just south of the town, state TV said.

"The joining of these forces greatly reduces the freedom of movement of ISIS insurgents in and out of Mosul," said Air Force Col. John Dorrian, a Baghdad-based spokesman for the U.S.-led coalition, referring to Islamic State. "They have already lost the effective ability to move in large numbers, but now this has been made more difficult for them."

Another prominent leader of the Popular Mobilisation units, Abu Mahdi al-Mohandes, said on Wednesday the Shia forces had linked up with the Peshmerga near Sinjar, completing the encirclement of a region that extends from Mosul and Tal Afar.

Mohandes said Popular Mobilisation would try next to separate Mosul from Tal Afar, which lies on the route between Mosul and Raqqa, the main city of the militant group's self-styled "caliphate" in Syria.

Displaced Iraqis, who fled the Islamic State stronghold of Mosul, gather at Khazer camp, Iraq. (Mohammed Salem/Reuters)

Thousands of civilians fled Tal Afar as Popular Mobilisation closed in on the town, which is mostly populated by ethnic Turkmen.

The exodus is worrying humanitarian organisations as some of the civilians are heading into insurgent territory, where aid cannot be sent to them, provincial officials said on Wednesday.

Those fleeing Tal Afar are Sunnis, who are in a majority in Nineveh province in and around Mosul. Tal Afar also had a Shia community, which fled in 2014 when the Sunnis of Islamic State swept through the region.

Abadi tried to allay fears of ethnic and sectarian killings in Tal Afar, saying any force sent to recapture it would reflect the city's diversity.

The Iraqi military estimates there are 5,000 to 6,000 insurgents in Mosul facing a 100,000-strong coalition of Iraqi government units, Kurdish Peshmerga and Shia militias.

Mosul's capture is seen as crucial towards dismantling the caliphate, and Islamic State leader Abu Bakr al-Baghdadi, believed to have withdrawn to a remote area near the Syrian border, has told his fighters there can be no retreat.

The militants are dug in among more than a million civilians as a tactic to hamper air strikes. They are moving around the city through tunnels, driving suicide car bombs into advancing troops and hitting them with sniper and mortar fire.

"We are controlling large parts of the eastern side," the commander of the Counter Terrorism Service, Talib Shaghati, told reporters in Bartella, one of the first villages taken from Islamic State after the offensive started. "One of the challenges we face ... is the presence of civilians."