ISIS has claimed responsibility for a terrorist attack that left 130 people dead in predominantly Shia area of Baghdad.

At least 131 people, including many children, have been killed and hundreds wounded in a car bombing in a crowded commercial area in Iraq's capital, Baghdad, hospital and police sources said.

The powerful explosion early on Sunday came near the end of the Islamic holy month of Ramadan, when the streets were filled with young people and families out after sunset.

Sources said around 200 people were wounded when a lorry packed with explosives blew up in a busy shopping street in Karada, a predominantly Shia neighbourhood in central Baghdad. 

The Islamic State of Iraq and the Levant (ISIL, also known as ISIS) group claimed responsibility for the attack in a statement circulated by its supporters online.

The group, which has claimed numerous deadly bombings in mainly Shia areas of Baghdad, alleged that a suicide bomber targeted a crowd of Shia Muslims.

Many of the victims were women and children who were inside a multi-storey shopping and amusement mall. Dozens burned to death or suffocated, a police officer said.

There were fears the death toll could rise as more bodies could be lying under the rubble of devastated buildings.

Prime Minister Haider al-Abadi condemned the bombing and declared three days of mourning across the country after visiting the scene of the attack.