The car bombs in a mainly Shiite neighbourhood were apparently a response to the attacks on a Sunni area of the Iraqi capital.
The attacks on Sunni began when gunmen set up fake checkpoints in the western Baghdad neighbourhood of Jihad and also raided people's homes.
Witnesses said the masked men went into certain Sunni houses and killed everyone inside.
"Outside the mosque I saw the bodies of 10 men, all shot in the head, and they showed severe signs of torture," said Sheikh Abdel Samad al-Obeidi, imam of the Sunni Fakhri Shanshal mosque.
"I blame the Mehdi Army militiamen for this killing -- it is all in the open now," he added, referring to the armed group linked to radical Shiite cleric Moqtada al-Sadr.
He also accused police commandos, who have checkpoints in the area, of being "complicit in the crime for turning a blind eye".
Sectarian violence
Sunni and Shiite holy places have increasingly become targets in ongoing sectarian violence in Baghdad.
Sheikh Mahmud al-Sudani, the imam of the Shiite mosque, claimed that the attacks were carried out by relatives of Shiites who had been killed or driven out of the predominantly Sunni neighborhood in recent months.
"For the past five months Shiites have been killed and evicted from the neighbourhood. Those Shiites killed come from tribes from the south that wanted to take revenge," said Sudani, a follower of Sadr.
Fakhria Hussein, a Shiite resident of the neighborhood who works outside it, received a call from her son telling her not to come home because it was too dangerous.
"He told me that masked men stormed into our neighbours' home, a Sunni, and he heard shots and screams," she said.
Firas Shimmari, a security guard, received a similar call from his brother who reported that the gunmen were checking people's IDs and attacking them if they indicated the person was Sunni.
"They looked at his ID and asked him where he was from and he said (the Shiite holy city of) Karbala, so they told him 'you are fine'," said Shimmari, adding that his brother had seen corpses by the side of the checkpoint.
The massacre ended only when US and Iraqi forces surrounded the area and imposed a curfew.
In other violence at least eight people were killed including two Sunni clerics from the powerful Muslim Scholars Association, a Sunni religious body.
Appeal for calm
Meanwhile, the abductors of Taiseer al-Mashhadani, a Sunni woman MP demanded the release of 25 prisoners held in US jails in Iraq in return for her freedom, a Sunni politician told AFP.
They freed two of the seven bodyguards captured along with her on July 1 in Baghdad.
"Today we face a very a deep and dangerous slope, which is killing based on identity," President Jalal Talabani, a Sunni Kurd, said in a statement.
"I call on the the Iraqi people to control themselves and avoid knee-jerk reactions which can only lead to regret and pain."
For his part Vice President Tareq al-Hashemi, a Sunni Arab, said the government must take immediate steps to protect civilians by purging the country's security forces of the influence of Shiite militiamen.
"This is a plea from the vice president to the prime minister to do the right thing and protect the lives of innocent people who have become targets for the militias amid the silence and non-intervention of some security forces," he told state television Al-Iraqiya.
A wave of sectarian violence has engulfed Iraq, especially Baghdad, since the bombing of a revered Shiite shrine in Samarra in February.
Sunday's rampage came despite an ongoing security operation in the capital since mid-June involving tens of thousands of troops patrolling the streets.