A Sunni woman MP was also kidnapped in north Baghdad along with eight of her bodyguards, a day after al-Qaeda leader Osama bin Laden vowed the war would go on despite a peace plan launched by Prime Minister Nuri al-Maliki.

The vast Shia neighbourhood of Sadr City, a stronghold of militiamen loyal to Shia radical leader Moqtada Sadr, has been a repeated target for Sunni Arab insurgents amid mounting sectarian violence.

The massive car bomb went off as a police patrol passed through the district's Al-Ula market, which was packed with morning shoppers, an interior ministry official said.

Witnesses said the bomb was concealed in a pick-up truck loaded with fruit and vegetables and that the driver blew himself up.

But security officials said initial reports suggested the bomb had been detonated remotely.

The force of the blast torched nearby market stalls and around 20 vehicles, an AFP photographer witnessed.

Fearful residents were seen desperately searching through the mangled wreckage for missing loved ones.

A US military vehicle, which attempted to approach the blast scene withdrew in the face of a hail of stones from angry residents.

Major General Jihad Taher al-Luaibi, head of the interior ministry's anti-explosives unit told state television: "The martyrs were of all sexes and ages -- innocent people. Their bones and flesh were crushed together.

"The impact of the explosion scattered pieces everywhere, as far as 500 metres (yards) from the scene," the general told state television.

Stressing that the security forces had asked for new equipment to detect car bombs, he said "if the prime minister is listening, please approve our request because this will save human lives."

Outside the city's Ibn Nafis hospital, a maimed survivor was carried out of an ambulance on a stretcher as a black-clad woman watched on sobbing.

Militiamen of Sadr's Mehdi Army threatened to take over the patrolling of the neighbourhood in the face of the continued ability of the fledgling security forces to prevent such deadly attacks.

"The Iraqi forces are not doing their job properly ... they are not checking cars that are entering the area. If this is the case, we will take the security of the area into our own hands," a Shia militiaman who gave his name only as Fuad told AFP.

In a separate roadside bombing in southeast Baghdad, another three people were killed, officials said. Four bodies were also found around the city.

Taiseer Najeh Awad al-Mashhadani, an MP for the National Concord Front, the largest Sunni Arab bloc in the Iraqi parliament, was seized in north Baghdad as she returned to the capital from the restive province of Diyala to the northeast, political and security sources said.

Her abduction came after the Shia prime minister launched a national reconciliation plan aimed at wooing members of the disenchanted former elite away from the protracted insurgency and back into the political process.

The violence was a reminder of the precarious security situation in the capital despite a massive security clampdown that has seen tens of thousands of US and government troops patrolling the streets for the past few weeks.

Government figures for June recorded at least 1,009 Iraqi dead in insurgent attacks, only slightly down on the 1,055 killed around Iraq in May.

The premier's plan includes proposals for an amnesty for at least some suspected rebels in a bid to stem the insurgency and mounting sectarian violence, and Maliki was due to begin a Gulf tour in oil-rich Saudi Arabia later Saturday to seek regional support for the proposals.

The US military was meanwhile facing fresh allegations of serious abuses against Iraqi civilians by its troops.

US officials announced Friday that investigators were probing allegations that at least two US soldiers raped an Iraqi woman and then murdered her and three family members.

The criminal investigation was ordered by Major General James Thurman, a senior commander in Iraq, after two other soldiers said they had heard about -- but not witnessed -- the alleged killing in March in the Mahmudiyah area, south of Baghdad, an officer said in Washington.

"Allegations known so far are that two soldiers allegedly raped an Iraqi woman and then allegedly one of the soldiers may have killed four Iraqi civilians located within that residence -- the woman, two other adults and a child," the official said. The soldiers belonged to the same 1st Battalion of the 502nd Infantry Regiment as Kristian Menchaca and Thomas Tucker, whose "severely traumatized" bodies were found on June 19 in the same restive region south of the capital.

The US military has come under the spotlight over a spate of abuse allegations since the 2003 invasion, most notoriously the mistreatment of detainees at Abu Ghraib, which prompted a string of convictions.