Iraq begins three days of national mourning on Monday for almost 120 people killed by a suicide bombing in a busy Baghdad shopping district claimed by Islamic State jihadists, the deadliest attack in the capital this year.

The blast hit the Karrada district early Sunday as the area was packed with shoppers ahead of this week's holiday marking the end of the Muslim fasting month of Ramadan.

Prime Minister Haider al-Abadi announced three days of national mourning for the victims as he visited the site of the attack, and his office said he had vowed to "punish" the perpetrators.

He also ordered changes to Baghdad security measures in response to the bombing, which security officials said killed at least 119 people and wounded more than 180.

The attack came a week after Iraqi security forces recaptured Fallujah from IS, leaving Mosul as the only Iraqi city under the jihadist group's control.

The blast set buildings ablaze, and crowds of people watched from the rubble-filled street as emergency personnel carried out victims and worked on the site.

A member of the civil defence forces said it would take "a number of days" to recover the bodies of the victims.

Hussein Ali, a 24-year-old former soldier, said six workers at his family's shop were killed, their bodies so badly burned they could not be identified.

"I will return to the battlefront. At least there, I know the enemy so I can fight him. But here, I don't know who I'm fighting," Ali told AFP.

- 'Cowardly and heinous act' -
IS issued a statement claiming responsibility for the suicide bombing, saying it was carried out by an Iraqi as part of "ongoing security operations".

The jihadist group said the blast targeted Iraq's Shiite Muslim majority, whom the Sunni extremists consider heretics and frequently attack in Baghdad and elsewhere.

UN Iraq envoy Jan Kubis condemned the "cowardly and heinous act of unparalleled proportions," calling on authorities to bring those responsible to justice.

Officials said another explosion in the Shaab area of northern Baghdad killed at least one person and wounded four on Sunday, but the cause of the blast was disputed.

Bombings in the capital have decreased since IS overran large areas north and west of Baghdad in June 2014, with the jihadists apparently more concerned with operations elsewhere.

But the group has struck back against Iraqi civilians after suffering military setbacks, and in May, Baghdad was rocked by a series of blasts that killed more than 150 people in seven days.

A video posted on social media showed men -- apparently angry at the government's failure to prevent the carnage in Karrada -- throwing rocks at what was said to be Abadi's convoy.

But the premier struck a conciliatory tone over anger directed towards him.

- IS defeat in Fallujah -
"I understand the emotional feelings and actions that occurred in a moment of sadness and anger," Abadi said in a statement.

With thousands of vehicles moving in and out of the city each day, such bombings are difficult to prevent.

But there are also flaws in security measures in the city, especially the continued use of fake bomb detectors at checkpoints years after the man who sold them to Iraq was jailed for fraud in Britain.

Abadi announced a series of changes to security measures following the Sunday bombing, including scrapping the fake detectors.

He also ordered the deployment of scanning devices at entrances to Baghdad to be sped up, directed that security personnel be banned from using mobile phones at checkpoints, and also called for increased aerial reconnaissance and coordination among security forces.

Iraqi forces completely recaptured Fallujah, a city 50 kilometres (30 miles) west of Baghdad, from the jihadists a week ago.

Anti-government fighters seized Fallujah in early 2014 and it later became one of IS's main strongholds in the country.

IS's defeat there was compounded by a devastating series of air strikes targeting jihadist forces as they sought to flee the Fallujah area.

Iraqi and US-led coalition aircraft destroyed hundreds of IS vehicles and killed dozens of fighters in two days of strikes against jihadist convoys after the end of the Fallujah battle, officials said.

With Fallujah retaken, Iraqi forces are now setting their sights on second city Mosul, the last major population centre held by IS in Iraq.