The bombing marred what had otherwise been a festive day as Iraqis marked what the government decreed National Sovereignty Day.
It came hours after four US soldiers were killed in combat Monday in Baghdad.
Despite the continued violence, Prime Minister Nouri al-Maliki assured Iraqis that government forces taking control of urban areas were more than capable of ensuring security.
"Those who think that Iraqis are not able to protect their country and that the withdrawal of foreign forces will create a security vacuum are committing a big mistake," he said in a nationally televised address.
He later appeared at a military parade to mark the day in the walled-off Green Zone in central Baghdad, with soldiers and policemen marching in formation while Iraqi helicopters flew overhead.
The withdrawal, which was completed on Monday, was part of a US-Iraqi security pact and marks the first major step toward withdrawing all American forces from the country by Dec. 31, 2011. President Barack Obama has said all combat troops will be gone by the end of August 2010.
The car bomb exploded as the vegetable and poultry market was crowded with people shopping for their evening meal, police Brig. Gen. Sarhat Qadir said.
Police and hospital officials gave the death toll and said about 40 people were wounded.
It was the latest in a series of bombings and shootings that have killed more than 250 people since June 20, including a truck bombing near Kirkuk that killed 82 people.
US and Iraqi officials have warned more violence was likely as suspected Sunni insurgents try to undermine confidence in the government in the days surrounding the withdrawal deadline.
The military said the four US soldiers who were killed Monday served with the Multi-National Division-Baghdad but did not provide further details pending notification of their families. It said they died as a "result of combat related injuries."
It was the deadliest attack against US forces since May 21, when three soldiers were killed and nine others were wounded in a roadside bombing in southern Baghdad.
The top US commander in Iraq said the latest deaths show militants remain a threat but said he was confident Iraqi security forces could face the challenge.
"It reminds me that there are still dangers out there. There are still people out there who do not want the government of Iraq to succeed. They do not want to see a democratic country move forward," Gen. Ray Odierno said Tuesday at a news conference.
He said many roadside bomb and rocket attacks in Baghdad were being carried out by militants being funded or trained by Iran, including recent strikes against the Green Zone, which houses the US Embassy.
But, he said, the number of such attacks was "significantly smaller" due to security measures making them more difficult to carry out.
"Iran is still supporting, funding and training surrogates who operate inside of Iraq. They have not stopped and I don't think they will stop," Odierno told reporters at Camp Victory, a US military base on the western edge of Baghdad.
He also said that 130,000 US troops remain in Iraq, although he declined to say how many would remain in cities as trainers and advisers.
"We will be here, we are not leaving," he said. "We'll continue to be in support of the Iraqi security forces to maintain and improve stability throughout the country and I feel confident that we'll be able to do that."
Al-Maliki has urged people to maintain support for Iraqi security forces but trepidation has been growing with the uptick in violence.
"I congratulate the Iraqi people on this day, June 30, when the US forces have withdrawn from Iraq cities in accordance to the forces withdrawal agreement," al-Maliki said. "We consider this day as a national holiday and it is a joint achievement by all Iraqis."
President Jalal Talabani said the day could not have happened without the help of the United States, which invaded Iraq in 2003 and ousted Saddam, who was later convicted by an Iraqi court and executed in December 2006.
"While we celebrate this day, we express our thanks and gratitude to our friends in the coalition forces who faced risks and responsibilities and sustained casualties and damage," Talabani said.
He also warned that "security will not be achieved completely without the proper political environment and without a real national unity and reconciliation."
If the Iraqis can hold down violence in the coming months, it will show the country is finally on the road to stability. If they fail, it will pose a challenge to Obama's pledge to end an unpopular war that has claimed the lives of more than 4,300 US troops and tens of thousands of Iraqis.
Some US troops will remain in the cities to train and advise Iraqi forces. US combat troops will return to the cities only if asked. The US military will continue combat operations in rural areas and near the border, but only with the Iraqi government's permission.
The US has not said how many troops will be in the cities in advisory roles, but the vast majority of the US forces remaining in the country will be in large bases scattered outside cities.
