A car bombing has struck a busy market area in eastern Baghdad, killing at least 12 people, Iraqi officials say.

The explosive-laden car went off at the Jamila wholesale market in Baghdad's Shia district of Sadr City on Monday morning, a police officer said.

The explosion also wounded 28 other people, he said, saying the death toll was expected to rise further.

A medical official confirmed the casualty figures. Both officials spoke on condition of anonymity because they were not authorised to talk to journalists.

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Thick black smoke billowed from the area and people were running away in panic. At the site, twisted metal and shards of glass littered the pavement, along with vegetables and other goods sold at the market.

At least one soldier was seen being evacuated from the scene, which was sealed off by security forces.

The Islamic State of Iraq and the Levant (ISIL, also known as ISIS) group claimed responsibility in an online statement on its media arms, the Aamaq propaganda agency.

The bombing comes as US-backed Iraqi forces are in final stages of recapturing the northern town of Tal Afar, about 150km from Syria's border, from ISIL.

On Sunday, the Iraqi military said it had "fully liberated" Tal Afar's town centre from ISIL.

On Monday, the troops fought at the outskirts of al-Ayadia district, about 10km northwest of Tal Afar, where most of the fighters fled.

Tal Afar was one of the few remaining towns in Iraq still in ISIL hands following the liberation of Mosul in July from the group.

ISIL still controls the northern town of Hawija, as well as Qaim, Rawa and Ana, in western Iraq near the Syrian border.