The attack comes as the U.S.-backed Iraqi military is promising to launch a major offensive in Diyala province aimed at taming the last major insurgent belt north of Baghdad. Baqouba is the province's capital.
The woman, who was shrouded in a traditional black Islamic robe, detonated her explosives belt at about 8:30 p.m. as she approached a group of Awakening Council guards in the central New Baqouba area, a police officer said.
The officer, who read the police bombing report but spoke on condition of anonymity because he wasn't authorized to release the information, and witnesses said the local Awakening Council chief, Naaim al-Duliami, was killed along with seven of his bodyguards.
The U.S. military in northern Iraq said troops were investigating the bombing and it could not immediately confirm that the attacker was a woman.
The Sunni turn against al Qaeda has been credited by the U.S. military as a key factor in driving down Iraq's violence to its lowest point in more than four years. Also cited are the U.S. troop buildup and a cease-fire declared by anti-U.S. cleric Muqtada al-Sadr for his Shiite militia.
Members of the U.S.-allied Sunni groups have frequently been targeted by al Qaeda in Iraq and other insurgents seeking to derail the security gains.
Earlier Thursday, gunmen killed three Awakening Council members in drive-by shootings at checkpoints in the Sunni neighborhood of Azamiyah in northern Baghdad, according to a leading member of the group, who spoke on condition of anonymity because of security concerns.
Baqouba and other areas in Diyala been hit by several bombings in recent months as Sunni insurgents show they retain the ability to cause casualties. Two suicide bombers attacked army recruits at a Baqouba military camp last week, killing at least 28 people and wounding 57.
Insurgents have increasingly been using women to stage suicide bombings in a bid to avoid security measures. Women are more easily able to hide explosives under their cloaks and they often are not searched at checkpoints.
Laying the groundwork for the expected new Diyala offensive, American soldiers of the 3rd Squadron, 2nd Stryker Cavalry Regiment have been searching caves and blowing up suspected hideouts believed used by al Qaeda near the mountain town of Qara Tappah, about 50 miles northeast of Baqouba.
They also checked IDs of adult males in each house and detained some on suspicion of being al Qaeda operatives as part of this week's sweep, "Operation Cat's Eye."
U.S. commanders have said they will assist Iraq's government in pursuing the Diyala offensive against militants who are trying to regroup in the area.
American soldiers held talks Thursday with local officials in Qara Tappah, about 30 miles west of the Iranian border and close to the Hamrin mountains. The town, with a mixed population of Arabs and Turkomens, had become a safe-haven for al Qaeda, U.S. officers say.
In June, a female suicide bomber targeted a crowd of soccer fans celebrating Iraq's 2-1 win over China in a World Cup qualifying match, wounding 34 people near a cafe in Qara Tappah, which means Black Hill.
On Thursday, a U.S. patrol struck an improvised explosive device in the area but no one was seriously injured, the military said.
In another reminder of the dangers still facing Iraqis, the 18-year-old son of the chief editor of a U.S.-sponsored newspaper was shot to death Wednesday as an American patrol passed nearby in the northern city of Kirkuk, police said.
Police Brig. Gen. Sarhat Qadir said it was unclear who fired the bullet that killed Arkan Ali Taha, suggesting it might have been a sniper aiming at the Americans.
"Police until now are still investigating and we can't say whether the Americans are to blame or the attackers," Qadir said.
The U.S. military said American troops came under small-arms fire from a purple sedan while they were on a foot patrol in the volatile city, 180 miles north of Baghdad.
"The soldiers returned fire in self defense, killing a passenger in the car. The driver of the vehicle was taken into custody," the military said. It said one soldier was wounded in the gunbattle.
In other developments: