About 80 people have been killed by a car bomb in the holy city of Najaf - among them leading Shia Muslim politician Ayatollah Mohammed Baqr al-Hakim.
The bomb blast caused chaos and devastation
At least 100 were also injured in the explosion near the Tomb of Ali in the central Iraqi city, one of the holiest shrines for Shia Muslims.
No group has admitted carrying out the attack - among the worst in the region for 20 years - which took place just as main weekly prayers were ending.
Shia figures suggest that supporters of ousted Iraqi leader Saddam Hussein could be behind the attack in an attempt to further destabilise the country.
Ayatollah Hakim - the leader of an Iran-backed group, the Supreme Council for the Islamic Revolution in Iraq (Sciri) - had returned to Iraq in May after spending more than two decades in exile in Iran.
His nephew Mohsen Hakim told the BBC the bomb planted next to his uncle's car exploded as he got into his vehicle after leaving the mosque.
Supporters of the ayatollah had earlier received information that there was a plot to attack him and had taken all necessary measures to try to protect him, his nephew said.
In his last sermon, the ayatollah had denounced loyalists of Saddam Hussein who he said were "now targeting the Marjiya (the top Shia religious leaders)".
The BBC's Jihan al-Ailaily at the main hospital in Najaf says doctors were overwhelmed by casualties.
She says surgeons were working non-stop to care for the wounded and issued a call for blood donations.
Part of the entrance to the mosque is said to have collapsed on the crowd, trapping many people.
BBC Middle Eastern affairs analyst Roger Hardy says that although critical of the Americans, the 63-year-old ayatollah was ready to work with them - a decision that earned him the hostility of more radical Shia factions.
But, our correspondent adds, if elements loyal to the old regime wanted to settle scores with the Shia and destabilise the country still further, they may have found a very effective way of doing so.
A Sciri spokesman in London, Hamid al-Bayati, told the BBC that when visiting Baghdad in May and June, he had told the US occupation authorities that protection of holy places and leading clerics should be stepped up.
"The allies did not respond to this proposal," Mr Bayati said. "I blame them for negligence in not protecting holy places and holy men."
A US military spokesman said no coalition forces were in the area "because
it is considered to be sacred ground".
The top US civilian official in Iraq, Paul Bremer, denounced the attack, saying "the enemies of the new Iraq will stop at nothing".
A Shia member of Iraq's Governing Council, Mowaffaq al-Rubaie, told the BBC that the council would be holding an emergency meeting in response to the bombing.
One of Ayatollah Hakim's younger rivals in Najaf, Shia cleric Moqtada Sadr, denounced the attack and called a three-day strike.
"We are calling for the people ... to demonstrate to condemn this crime," he told the Arab news channel al-Jazeera.
Thousands of Shias waving banners and pictures of Ayatollah Hakim
marched through Baghdad, many beating themselves in grief
at the cleric's death.
In Iran, Supreme Leader Ayatollah Ali Khamenei announced three days of mourning.
"The martyrdom of (Hakim)... is a grave catastrophe for the Iraqi nation and is another document of the occupiers' crimes which have imposed insecurity and chaos on Iraq with their
illegitimate presence," he said.
In Lebanon, top Shia cleric Sayyid Mohammad Hussein Fadlallah described the attack as an act of savage terrorism against the unity of Muslims.
UK Foreign Secretary Jack Straw said the attack was the kind of nihilistic terrorism seen in last week's attack on the United Nations headquarters in Baghdad.
Najaf has been the scene of violence in recent months.
On Sunday, three people were killed there in an assassination attempt on another leading Shia Muslim cleric, Grand Ayatollah Seyed Mohammed Said al-Hakim - the uncle of the Sciri leader.
Four months ago Abdel-Majid al-Khoei, a prominent cleric who had returned from exile in London, was killed in the city.