At least 120 people were killed in a car bombing claimed by the Islamic State militia (also known as Daesh) at a busy market in Iraq's eastern province of Diyala, its governor said Saturday.



Muthana al-Tamimi told the Iraqi website Almada Press that 130 people were wounded in the attack Friday night in Bani Saad, 35 kilometres north-east of Baghdad.



Many of the wounded are in serious condition, according to local media.



The attack is believed to be the deadliest in Iraq this year.



The explosion occurred while locals were gathering to celebrate the Muslim festival of Eid al-Fitr, which marks the end of the fasting month of Ramadan.



Footage on local television stations showed bodies lying amid rubble of devastated buildings and cars in flames.



At least 50 stores and 75 cars were destroyed in the blast, said Mohammed al-Hamadani, a provincial council official.



"What happened in the Bani Saad market is a massacre against innocent people," al-Hamadani said.



Local authorities cancelled the Eid celebrations and declared three days of mourning for the victims.



Iraqi government troops, backed by US-led airstrikes, have in recent months stepped up their fight to dislodge Islamic State from its northern and western strongholds in the country.



The radical group also controls large areas in neighbouring Syria.