A hospital official in the city confirmed receiving 25 dead.
"This attack has the fingerprints of al-Qaeda," provincial governor Salim Hussein Alwan told a news conference, adding authorities were investigating the explosion.
Shortly after the attack, Diwaniyah officials imposed a curfew across the city of some 440,000 people.
Women and children were among the victims of the attack that hit the main vegetable market of Diwaniyah, where 15 shops and stalls were destroyed, the officials added.
The blast came just hours after near-simultaneous car bombs targeting Shiite pilgrims at Freyha, a village on the outskirts of the central shrine city of Karbala, killed four people.
"There were four killed and 13 wounded by two car bombs at around 7:00 am, east of Karbala," provincial police spokesman Lieutenant Colonel Ahmed al-Hasnawi said.
A medical official in Karbala put the toll at four dead and 33 wounded.
Karbala is frequented by Shiite pilgrims as it is the site of shrines to Imam Hussein and his half-brother Abbas, both central figures to Shiite Islam.
Friday's ceremonies are to mark the birth of another figure, known as the 12th imam, and pilgrims visiting the city are frequent targets of Sunni insurgents.
"A large number (of pilgrims) will travel to Karbala this week and radical groups such as al-Qaeda... may try to attack them in an attempt to inflict numerous casualties and enflame inter-communal tensions," John Drake, an analyst with private security firm AKE Group, said in a statement on Tuesday.
Two separate gun and bomb attacks in the restive province of Diyala, north of Baghdad, killed four people - two anti-Qaeda militiamen and two farmers - security and medical officials said.
Also north of the capital in Taji, a policeman was among two people killed in simultaneous bomb attacks, an interior ministry official said. A hospital official said three people died in the blasts.
The first explosion was followed closely by a second blast as police rushed to the scene, the ministry official said, adding that 14 people were also wounded, eight of them policemen.
Another bomb attack in the town of Tuz Khurmatu, north of Baghdad, killed a policeman and wounded another, an officer and a local doctor said.
The overall death toll of 36 was the worst in Iraq since June 13, when a wave of apparently coordinated bombings and shootings killed 72 people.
Tuesday's violence comes amid a spike in attacks in Iraq, with the country suffering violence in June that left at least 282 people dead.
