Another 38 people were wounded by the 10 am blast in the sprawling Shia slum. People frantically carried survivors from the narrow muddy street to ambulances, and hauled away bodies in blankets.

The bomb was hidden in a barrel near the tanker truck, where scores of people were waiting to buy fuel, said police Col Saad Abdul-Sada.

There were more people on hand than usual as families sought to stock up on fuel for the Muslim holy month of Ramadan, he said.

Seventeen women were among the dead, Abdul-Sada said, adding that casualties were expected to rise.

Sadr City is home to more than two million people and a stronghold of the Mahdi army a Shia militia loyal to radical cleric Muqtada al-Sadr.

Just 24 hours earlier, an al-Qaeda led group had warned of attacks during Ramadan, which for Sunnis began on Saturday. Shias begin marking the month on Sunday.

Police said the bomb was made up of two barrels packed with explosives and that at least 34 people were wounded in the attack.

"The explosives were set off as people gathered to buy fuel from a petrol tanker which was standing at the service station," a police officer said.

The blast came as Iraqi state television carried an announcement from the prime minister that the leader of an al-Qaeda allied group, Sheikh Montasser al-Juburi of the Ansar al-Sunna, was arrested northeast of Baghdad. Two aides were also detained. Sadr City, the impoverished district home to nearly two million Shias, is often a target for Sunni extremists in the Shia-Sunni sectarian conflict in which thousands of people have died since February.

Thousands of young Shias from the district are loyal followers of radical cleric Moqtada al-Sadr and are members of his Mahdi Army militia, which the US military has accused of killing Iraq's Sunni Arabs.

The Sadr City bombing followed a warning on Friday by the al-Qaeda led group, the Mujahedeen Shura Council, of increased attacks during Ramadan.

"The ... Mujahedeen Shura Council announces that Saturday is the beginning of the blessed month of Ramadan" for Sunnis, it said, adding it hoped this would bring "conquests and victories".

A little-known Jeish al-Fataheen group also called on Muslims to "strike at the fortresses of the infidels and hypocrites" in a statement also saying it wished Ramadan was full of "victories".

The Islamic fasting month of Ramadan has been characterised by a spike of violence in Iraq in the past few years.

US military commanders have warned of increased attacks this year also during Ramadan -- the holiest period of the Muslim calendar.

"We are anticipating an increase of foreign fighters in Ramadan. Ramadan is a period of increased violence," US military spokesman Major General William Caldwell told reporters on Wednesday.

Sunni imams have however called for peace during the month.

In his Friday sermon, Mahmud Mahdi al-Sumaydaie, imam of Sunni Umm al-Qura mosque in Baghdad, urged "promoters of violence to strike a truce at least in Ramadan and let people alone with their prayers."

"Ramadan should be without killings and militias," he said referring to Shia militias who Sunnis accuse of killing members of their community.

In July and August, a total of 6,599 civilians were killed, according to a United Nations report. Most of the dead were in Baghdad despite a massive security crackdown since mid-June and the presence of nearly 60,000 US and Iraqi troops and police patrolling the streets of the capital.

The Shia-Sunni sectarian conflict has gripped Iraq since February when a revered Shia shrine was bombed in the northern town of Samarra.

US military commander Major General James Thurman said on Friday that he was still short of 3,000 Iraqi troops for the Baghdad security plan.

Thurman said the promised troops had refused to travel to Baghdad from their regions outside the capital.

He said he needs the troops -- six battalions' worth -- to reinforce US troops and police in areas of Baghdad that are being cleared of insurgents.

"Some of these battalions, when they were formed, were formed regionally, and some of the soldiers, due to the distance, did not want to travel into Baghdad. And the minister of defence is working with that," Thurman said.

The Iraqi government promised the battalions as part of a stepped-up campaign in August to quell sectarian violence in the city, he said.

Thurman said there were roughly 15,000 US troops in Baghdad. The Iraqis have 9,000 army troops, 12,000 national police and 22,000 local police in the city.