The explosion reportedly occurred in an area between the two main Shi'ite shrines in the city, and authorities say it was caused by either a suicide bomber or a roadside bomb.
A police spokesman said the casualty toll came from two main hospitals.
Many of the casualties were street vendors and visitors to the Imam Hussein shrine, one of the holiest for Shi'ite Muslims.
It is the second bomb attack in Karbala in as many days.
Ambulances rushed to the scene to carry off the wounded as stunned survivors -- many of them street vendors and shoppers -- looked on in horror and confusion.
Iraqi television broadcast pictures showing body parts and items of clothing lying in pools of blood in the middle of a busy market area next to a shrine.
Iranian pilgrims are reported to be among the casualties.
Karbala, 110 kilometres south of Baghdad, has been relatively calm for the past year, however a car bomb that wounded two people on Wednesday shattered the peace.
Iraqi police took over full control of security in Karbala from the US-led military forces in September last year.
The last large-scale attack in Karbala occurred in December 2004 when 14 were killed and 57 wounded by a car bomb.
More than 50 people died in attacks across Iraq on Wednesday.
It was the bloodiest day since the 15 December election.