A car bomb killed 26 civilians and wounded 60 in a Shi'ite district of eastern Baghdad on Sunday, police said.

The bomb was in the Sadr City neighborhood, a poor area that is a stronghold of Shi'ite militias. Two weeks ago, a car bomb in the area killed about 60 people, one of a number of very bloody incidents this month that have raised fears of civil war.

There were also clashes in the district overnight between the Mehdi Army of Shi'ite cleric Moqtada al-Sadr and U.S.-led forces, residents and police said.

The U.S. military said in a statement that Iraqi troops raided a site in mainly Shi'ite eastern Baghdad targeting two people believed to be involved in "death squads" -- a term usually applied to Shi'ite militia activity.

It said eight people were detained after a battle involving machineguns and grenades and that two Iraqi hostages were freed.

Two other people were arrested in a similar raid in northwestern Baghdad, the military said.

PHOTO CAPTION

An Iraqi policeman walks past bodies of civilians at a morgue in Baquba, 65 km (40 miles) northeast of Baghdad July 22, 2006. (Reuters)