Sunni Muslims began marking Eid al-Fitr on Friday but Iraq’s majority Shiite community will start their celebrations on Saturday.
ISIS militants claim to have killed at least 100 people, including children, with a vehicle bomb in the Iraqi town of Khan Bani Saad, where people had gathered to celebrate Eid al-Fitr.
Parts of the predominantly-mixed Diyala province were captured by the Islamic State group previous year.
Iraqi television aired footage of the explosion, showing several completely gutted buildings and flying debris over a large area.
“Some people were using vegetables boxes to collect body parts of kids’ bodies”, said police major Ahmed al-Tamimi from the site of the explosion, describing the damage to the market as “devastating”.
Crowds consumed by grief and anger over the attack smashed the windows of cars parked in the street.
The jihadists no longer have fixed positions there but have reverted to their old tactics of planting auto bombs, carrying out suicide operations or hit-and-run attacks.
Diyala province has been partially controlled by the self-proclaimed Islamic State terror group since 2014.
The security situation in Iraq has drastically deteriorated since June 2014, when bloody clashes broke out between security forces and Islamic State militants.
The United Nations said earlier this week that almost 15,000 people had been killed in the 16-month period up to April 30.