The attack occurred near an outside market in the village of Abu Saydah in the volatile Diyala province, local police said, giving the casualty toll.
Residents of the farming village of 10,000 people said the attack appeared to be revenge for a confrontation a month ago in which locals killed 12 al-Qaida fighters. They said residents had fought back against Sunni militants trying to storm the village and 10 days later received threats to leave the village or face death.
It was not clear why the bombing went unreported until Wednesday, more than 12 hours after police said the explosion occurred.
Hospital officials and victims said it appeared chlorine gas was used in the attack since many of the wounded were having difficulty breathing and their sight was affected. But Lt. Col. Michael Donnelly, a U.S. military spokesman in northern Iraq, and provincial Iraqi police officials denied that toxic gas was involved.
"Our folks on the scene ... who are investigating this do not have any of those indications," Donnelly told The Associated Press. But the investigation was continuing, he said.
One man had a white cloth across his eyes as he lay in his hospital bed; others were bandaged from head to toe.
Abu Saydah is a mainly Shiite village about 25 miles northeast of the Sunni insurgent stronghold of Baqouba, the capital of the province that has seen a recent spike in violence largely blamed on militants who fled Baghdad ahead of a U.S.-Iraqi security crackdown.
Kadim Hussein, a 45-year-old farmer who was taken to the Imam Ali hospital in Sadr City, claimed the hospitals in Baqouba would only accept Sunnis.
"My eyes became puffy due the chlorine gas that was packed in the car bomb," he said, adding he also had difficulties breathing.
A hospital official said the facility had received three bodies and 11 of those wounded who all showed symptoms of chlorine poisoning. The official spoke on condition of anonymity because he wasn't authorized to speak to the media.
Diyala province — with its mixed Shiite and Sunni Muslim population — has been the scene of frequent violence of a sectarian nature as well as attacks by anti-U.S. insurgents.
Meanwhile, thousands of U.S. forces continued to search for three American soldiers feared captured by al Qaeda last week after an attack on their convoy south of Baghdad, which also killed four U.S. troops and an Iraqi soldier.
U.S. aircraft dropped leaflets on an area south of Baghdad Wednesday, seeking information on three soldiers feared captured. Trucks with loudspeakers were roaming the area urging people to come forward with any information. No details of the leaflets or their precise message were released.
They were lost Saturday in an ambush in the so-called Triangle of Death. Four of their comrades were killed.
An umbrella terror group calling itself the Islamic State of Iraq claims responsibility and has warned the U.S. to stop the search.
All the soldiers are with the storied 10th Mountain Division based at Fort Drum, New York.
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