The march -- organised by radical cleric Moqtada al-Sadr -- was the largest foreign show of support for the Lebanese Shi'ite guerrillas in the three weeks since Israel launched a devastating ground and air offensive against them.
The size and fervour of the rally stoked political tensions in Baghdad, where Sadr's movement has tense relations with the city's Sunni minority, US-led coalition forces and Iraq's fragile government of national unity.
Chanting “Death to Israel” and “Resistance” demonstrators were escorted by large numbers of black-clad armed fighters from Sadr's Mehdi Army.
Friday’s demonstration passed peacefully until a convoy carrying protesters home was attacked by gunmen as it passed through a Sunni district.
Three protesters were killed and six injured in the ambush, an interior ministry official said, confirming reports from protest organisers.
The Shi'ite demonstrators wore white shrouds to demonstrate their willingness to accept martyrdom, marched over US and Israeli flags and waved hundreds of yellow Hezbollah flags in support of the militia's war against Israel.
Portraits of the Lebanese Shi'ite group's leader, Hassan
Nasrallah, were carried through a massive crowd in the teeming Sadr City district of the Iraqi capital.
Estimates of the size of the crowd varied. While Sadr's officials insisted a million people had turned out, US military spokesman Major Steven Stover said images taken by drone aircraft showed only 14,000.
"This million-man demonstration is to support the resistance in Lebanon," cleric Hazem al-Aariji told worshippers at Friday prayers before the march.
"For 22 days the Israelis could not invade Lebanon ... Hizbollah has terrified the Israelis because they do not fear death," he declared.
The rally lasted an hour before participants dispersed peacefully. Police reported a Katyusha rocket was fired at the neighbourhood but did not land near the march and left no casualties.
Security around Sadr City was especially high with police and army units on the outskirts, while Sadr's militiamen searched bystanders and demonstrators.
"We will win by God's help, the Mehdi Army and Hizbollah," the demonstrators chanted. "We are soldiers, ready for Nasrallah's call."
The Israeli bombardment of Lebanon has angered both Sunni and Shi'ite Iraqis, and preachers across the country brought up the issue in Friday sermons, condemning Arab governments for their meagre response to the campaign.
Sadr's show of force, feeding on the anger of many Iraqis at the actions of US ally Israel, came as coalition commanders in Iraq urged the Iraqi government to move against militias.
General John Abizaid, the top US commander for the Middle East, said neighbouring Iran was arming Iraqi death squads, that militias have infiltrated the police, and that more US troops are needed to bring Baghdad under control.
A senior coalition official, however, cautioned against treating the Mehdi Army as a monolithic entity, as it is a loosely organised body with only parts actively engaged in violent and illegal activities.
"We have to be careful that we don't demonise Jaish al-Mehdi, because look at the polls -- Moqtada Sadr himself is an enormously popular figure. Why? Because he is thumbing his nose at the coalition," he said.
Baghdad has been battered by a wave of bomb attacks against police patrols and crowded civilian areas, while gunmen from rival Shi'ite and Sunni factions carry out nightly killings and lob mortar shells across the city.
Elsewhere around Iraq, 33 people died, mostly in the northern province of Nineveh, where insurgent bombers and gunmen killed 19 people, mostly police officers.