The explosion in Najaf caught worshippers as they exited the Tomb of Ali shrine at noon on the main Muslim day of prayer.
People frantically dug up the rubble to find survivors
The large blast brought down part of the entrance to the mosque onto the crowd and reduced a line of shops opposite to a tangle of metal and wood.
Eyewitnesses say Ayatollah Mohammed Baqr al-Hakim, the leading political Shia figure in Iraq, was about to drive away when the bomb exploded, destroying his car.
"As [the ayatollah] went out, and before we and the worshippers left, the blast went off," one man said.
"After that we knew nothing of what happened. The Mosque of the Tomb of Imam Ali was full of a crowd of worshippers."
Eyewitnesses said bodies and body parts lay on the ground, as the injured wandered around the square in panic.
Goods for sale were also strewn in shreds about the pavement.
"I was inside the mosque praying and suddenly there was a
huge explosion," said Amuri Faleh. "I came out to the street and found dead bodies and arms and legs scattered all over the place."
People could be seen digging frantically in the rubble to find survivors around a deep bomb crater filled with twisted metal and black water.
A number of gutted and destroyed cars, two of them flipped over by the force of the blast, were strewn across the street beside the mosque.
The hospitals in Najaf were soon overwhelmed with casualties.
The BBC's Jihan al-Ailaily was at one of the city's main hospital.
"They are not saying much, but at only this hospital, which is the biggest, it's been confirmed that there are 80 dead and over 100 injured.
"As I'm speaking to you, I'm seeing a woman sobbing and a guy. She's beating her head and the man - who looks like her son - is wearing his trousers filled with blood.
"I took a brief look at what is considered the morgue and I could see coffins being laid outside the morgue, and the bodies are completely covered with blankets."