The blast comes as the government is locked in a political crisis that some have warned could undermine the fight against IS.
The bombing, which hit the frequently targeted Sadr City area of northern Baghdad at around 10:00 am, killed at least 64 people and wounded 82 others, officials said.
The blast set nearby shops on fire and left debris including the charred, twisted remains of a vehicle in the street.
"The state is in a conflict over (government positions) and the people are the victims," said a man named Abu Ali. "The politicians are behind the explosion."
Abu Muntadhar echoed his anger.
"The state is responsible for the bombings that hit civilians," the local resident said. The politicians "should all get out."
Cleric Moqtada al-Sadr, who spearheaded a protest movement demanding a cabinet reshuffle and other reforms, has a huge following in the working class neighbourhood of Sadr City, which was named after his father.
It said a suicide bomber it identified as "Abu Sulaiman al-Ansari" detonated the explosives-rigged vehicle.
IS, which overran large areas in 2014, considers Shiites, who make up the majority of Iraq's population, to be heretics and often targets them with bombings.
Iraqi forces have regained significant ground from IS, but the jihadists still control a large part of western Iraq, and are able to carry out frequent bombings in government-held areas.
The months-old political crisis has led to repeated mass demonstrations that required a huge security deployment and hampered government action at a time when Iraq is still battling jihadists on several fronts.
The United States and the United Nations have warned the political impasse could undermine the fight against IS.
Prime Minister Haider al-Abadi has sought to replace the cabinet of party-affiliated ministers with a government of technocrats, a move opposed by powerful parties that rely on control of ministries for patronage and funds.
