Then incident has threatened to sharpen sectarian tensions as Shi'ite politicians blocked a bid to have parliament try to break the deadlock on forming a new government.
Elsewhere, the US military announced the arrest of a top insurgent leader believed to have been responsible for last year's kidnapping of Italian journalist Giuliana Sgrena.
These events came the same day as the former chief of Saddam Hussein's Revolutionary Court told Saddam's trial the 148 Shi'ites he sentenced to death over an attempt on the ousted dictator's life had been given a fair trial.
About 30 people were wounded in the Najaf car bombing, which occurred about 300 yards from the Imam Ali shrine, police chief Major General Abbas Miadal said. The shrine, among the most sacred sites for Shi'ite Muslims, contains the tomb of the prophet Mohammed's son-in-law.
Dr Essa Mohammed, director of the Najaf morgue, said 10 people were killed, including four women.
Such attacks are rare in Najaf, which is tightly controlled by police and Shiite security guards. Even though the casualty figure was modest by Iraqi standards, such attacks within Najaf are seen by Shi'ites as a grave provocation because of the city's stature as one of their most sacred sites.
The bombing on February 22 that destroyed the golden dome of a Shi'ite shrine in Samarra triggered a wave of reprisal attacks against Sunni mosques and clerics, plunging the country to the brink of civil war.
Following today's blast, Iraqi police and army sealed off the centre of Najaf and ordered people to leave the area for fear other bombs may be hidden there. The bomb exploded on Tosi Street which leads to the city's massive cemetery.
The route is often used for funeral processions of Shiites from throughout the country.
Mohammed Hila Hammad Obeidi, a key insurgent leader, was arrested last month south of Baghdad but the announcement was delayed until DNA tests confirmed his identity, the US said in a statement.
Obeidi, also known as Abu Ayman, was believed to have masterminded the kidnapping of Sgrena and others as well as assassinations. Sgrena was released after a month's captivity.
At Saddam Hussein's trial yesterday, former judge Awad al-Bandar said his court carefully examined evidence and always sought to spare the innocent.
He said he took 16 days to sentence the 148 to death.
"God as my witness, we were happy if someone was innocent and the Iraqi can go back to his family."
One prosecutor showed a document he said showed that 46 people died under interrogation before reaching Bandar's chamber.
"The court was legal and I practiced my role. The defendants confessed and I set a sentence that pleases God," said Bandar.
Asked if he thought sentencing the 148 people to death was hasty, Bandar replied: "Would you sentence them one by one? That's why we read out the sentence for all of them in one go."