One hundred and fifteen people have been killed in an attack by the Islamic State group on a crowded marketplace in Iraq's eastern Diyala province, one of the deadliest single attacks in the country in the past decade.

The mostly-Shiite victims had gathered to mark the end of the Islamic holy month of Ramadan, which ended Friday for Iraqi Shiites and a day earlier for Iraqi Sunni Muslims.

Police said a small truck detonated in a crowded marketplace in the town of Khan Beni Saad on Friday night in what quickly turned celebrations into a scene of horror, with body parts scattered across the market.

At least 170 people were injured in the attack, police officials said.

Men quickly emptied boxes of tomatoes to use them for carrying the bodies of small children, witnesses said, while adult victims lay scattered around the attack scene waiting for medical assistance.

"Khan Beni Saad has become a disaster area because of this huge explosion," Diyala resident Sayif Ali said. "This is the first day of Eid, hundreds of people got killed, many injured, and we are still searching for more bodies."

The Islamic State group claimed responsibility for the attack in a statement posted on Twitter accounts associated with the militant group.

Iraq's speaker of parliament, Salim al-Jabouri, said the attack has struck an "ugly sectarian chord," and added that the government was making "attempts to regulate Daesh's terror from destabilising Diyala security", referring to the militant group by its Arabic acronym.

But anger is rife in the volatile province, where a number of towns were captured by the Islamic State group last year. Iraqi forces and Kurdish fighters have since retaken those areas, but clashes between the militants and security forces continue.

"We went out to the market for shopping and preparations for the holiday Eid in order to receive holiday cheer," said another resident, who spoke anonymously for fear of retribution. "But this joy has turned to grief and we have lost family, friends and relatives, all because of this government's failure to provide us with security."

Security forces were out in full force across Diyala today, with dozens of new checkpoints and security protocols immediately implemented in the wake of Friday's attack.

"This horrible carnage is truly outside all boundaries of civilised behaviour," Jan Kubis, the special representative of the United Nations mission in Iraq, said.

The Sunni militant group has been behind several similar large-scale attacks on civilians or military checkpoints as it seeks to expand its territory. The group currently controls about a third of Iraq and Syria in a self-declared caliphate.

Diyala, which borders Iran, is the only province in Iraq where Iranian jets are known to have conducted airstrikes against the Islamic State group earlier this year.

Elsewhere in Iraq, a roadside bomb on a commercial street in Baghdad's Dora district today killed four people and wounded seven. North of Baghdad, a roadside bomb on a commercial street in al-Rashidiya killed three people and wounded 11.

Meanwhile, reports emerged today that the Islamic State group used projectile-delivered poison gas against Kurdish forces in Iraq and Syria on several occasions last month.

Joint, on-site investigations by two UK-based organisations, Conflict Armament Research (CAR) and Sahan Research, concluded that IS forces used chemical agents to attack Iraqi peshmerga forces and Syrian Kurdish People's Protection Units (YPG) on June 21, 22 and 28.

In the Syria attacks, IS militants launched 17 artillery projectiles against YPG forces stationed to the south of the village of Tell Brak in Hassakeh province. The projectiles released a chemical agent which induced in some cases loss of consciousness and temporary, localised paralysis.

Another seven projectiles were also launched into civilian residential areas in Hassakeh.

In the Iraq attack, IS forces fired a projectile containing a liquid chemical agent at a peshmerga checkpoint near the Mosul Dam, triggering symptoms among the Iraqi forces that included headaches, nausea and light burns to the skin.

The findings on the attacks in Syria were confirmed by an YPG statement issued Saturday. The type of chemical used is not known.

The British-based Syrian Observatory for Human Rights also reported an apparent IS chemical attack on June 28.