Police rushed to the scene after a small explosion in the market area, witnesses said.
In the ensuing ambush a policeman was shot and then a suicide bomber ploughed into a patrol car before setting off his explosives, said Tahseen Mahmoud, a grocer wounded in the leg and torso.
"The market is normally very busy at this hour because people do their shopping there before heading home," said Nassim Khodr, a local shopkeeper. "I just saw flames bursting into the sky and people burning."
At least 20 shops were damaged, five cars destroyed and a number of the victims, many of them policemen, were burnt to death.
Twenty-eight people were also wounded, with most casualties taken to the general hospital in Kirkuk.
A few hours earlier, three Iraqi soldiers were wounded when another suicide bomber drove his explosives-laden car into a military roadblock just south of Kirkuk.
The latest bloodletting came as one of Iraq's vice presidents, Adel Abdel Mahdi, said the government stood ready to help insurgents lay down their weapons, in the latest bid to encourage reconciliation in the war-torn country.
"We are not bent on revenge. We will help any party wishing to disarm," he told reporters.
His comments came just two days after President Jalal Talabani said he was prepared to hold talks with rebels.
As further evidence of Iraq's continuing instability a mortar round landed near palace of former Iraqi President Saddam Hussein during a ceremony in Tikrit attended by top officials.
There were no injuries but the ceremony, held to mark the handover by US forces to Iraqi authorities of a former Saddam Hussein palace complex on the outskirts of the northern town, was briefly interrupted.
Offensive ends
US and Iraqi forces have wrapped up a major17-day offensive against suspected Al-Qaeda operatives near the Syrian border, with 139 rebels killed and 256 captured.
Ten US marines were also killed in fighting during the operation known as Steel Curtain, adding to a growing death toll which has seen 2,100 US military personnel lose their lives since the March 2003 US-led invasion.
The military said the assault was aimed at preventing Al-Qaeda fighters operating in the Euphrates River Valley and throughout the restive western province of Al-Anbar.
"The operation made way for the establishment of a permanent Iraqi army security presence in the Al-Qaim region and set the conditions for local citizens to vote in the upcoming December 15 elections," it said.
It also marked the Iraqi army's first large-scale operational deployment in Al-Anbar with about 1,000 soldiers, while the US force numbered 2,500 troops.
Iraq report
Meanwhile a major report claims that British troops could be embroiled in Iraq for decades.
The study by the Oxford Research Group says al-Qaeda could keep the US tied up in Iraq for many years and Britain would only withdraw troops in the highly unlikely event of a break with Washington.
The ORG has studied the latest events in Iraq and says the war is still in its early stages and is likely to last for decades.
The group says the occupation has been a gift to al-Qaeda the terrorist group winning recruits by portraying the US presence as a neo-Christian occupation of a major Islamic state.
Withdrawal plan
In Washington a leading Democratic senator has unveiled a plan to gradually withdraw US troops from Iraq, just days after another respected member of Congress caused a stir by calling for an immediate pullout of US forces.
Senator Joseph Biden has said that he would like to see 50,000 US troops pulled out from Iraq in 2006, with additional troops to be withdrawn the following year.
The timing of a US troop pull-out from Iraq, Biden said, is "the question on the minds of most Americans."
"Here is my conviction: in 2006, American troops will begin to leave Iraq in large numbers. By the end of the year, I believe we will have redeployed at least 50,000 troops.
"In 2007, a significant number of the remaining 100,000 American soldiers will follow," he told an audience at the Council on Foreign Relations in New York.
Senator Biden, the top Democrat on the Senate Foreign Relations Committee, made his remarks after highly-regarded Democratic lawmaker, Representative John Murtha, last week said US troops should be withdrawn immediately.
But Senator Biden, said a complete troop withdrawal would be a mistake, despite the mounting cost and casualties of the US military operation in Iraq.
Iraq debate disturbing
At the same time a top US general has said that the increasingly angry political debate over the US military presence in Iraq was "disturbing" but had not undermined troop morale.
Lieutenant General John Vines, commander of the multinational forces in Iraq, stuck doggedly by the US administration's opposition to giving a timetable for the withdrawal of American troops.
"A precipitous pullout, I believe, would be destabilising," the second-ranking US officer in Iraq told a Defence Department press briefing from Baghdad.
Iraq has been one of the main causes for President George W Bush's all-time low standing, and the US involvement in Iraq has become a major dispute between Democrats and Bush's Republicans.
"Of course the debate and the bitterness is disturbing," Lt Gen Vines said.
"But after all, we are a democracy, and that is what democracy is about, is people will have differences of opinion."
When questioned about troop morale, Lt Gen Vines added: "Certainly, soldiers are concerned about whether or not they enjoy the support of not only their elected representatives but the people."
He said the feeling among soldiers was "they know that they have their support."