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Police and the US military said the bomber struck in the town of Iskandariya, 40 km (25 miles) south of Baghdad, hours after militants killed three pilgrims and wounded 36 others in an attack in southern Baghdad, police said.
Police said 40 people were killed and 46 wounded, despite a major tightening of security. The US military had said hospital officials were reporting 25 dead and 50 wounded.
The military said in a statement that the attack took place on a two-lane highway near a residential area where about 42,000 pilgrims had passed through earlier in the day.
Tens of thousands of Iraqi soldiers and police have been deployed for the Arbain festival after suspected Sunni Arab insurgents killed 149 pilgrims on their way to Kerbala for the event last year, in one of the worst spasms of violence since the US-led invasion of Iraq in 2003.
The pilgrims are particularly vulnerable to attack because many prefer to walk to Kerbala, 110 km (70 miles) south of Baghdad. They believe the effort will bring them greater spiritual reward.
In the Baghdad attack, the pilgrims were hit by a roadside bomb and then fired on by gunmen on a road used by thousands of pilgrims walking to the festival of Arbain in the holy southern Shi'ite city of Kerbala, police said.
The US military gave a different account, saying gunmen had lobbed hand grenades at the pilgrims in Baghdad, killing one and wounding 17.
It said US and Iraqi forces would increase patrols and checkpoints, restricting vehicle access through key routes to Kerbala from southern Baghdad.
VEHICLE BAN
Millions of Shi'ite pilgrims are expected in Kerbala for Arbain this week, which commemorates the end of the 40-day mourning period following Ashura, a religious ritual that marks the death of Prophet Mohammad's grandson in 680.
Kerbala's police chief, Major-General Raad Shakir, told Reuters last week that 40,000 police and soldiers had been deployed and that Iraqi tanks were being used to protect the city for the first time.
All public transport, including bicycles, has been banned within a 25 km (15.5 mile) radius of the city, and 600 female security staff have been assigned to search women, police said.
Militants have used horses and carts, bicycles and motorcycles in bomb attacks in the past. There has also been a spate of suicide bombings carried out by women in recent months.
In previous years, militants have killed scores of pilgrims in suicide bombings and other attacks. Sunni Islamist al Qaeda views Shi'ites, a majority in Iraq but a minority in the Muslim world, as heretics.
Last August, clashes between rival Shi'ite factions during another religious festival in Kerbala killed dozens of people and forced the hurried evacuation of hundreds of thousands of pilgrims.

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