A car bomb exploded in a street market in the mainly Shi'ite Iraqi town of Khalis on Thursday, killing 10 people and wounding 25 others, police and hospital officials said.

Authorities dispatched special forces and locked down the town 80 km (50 miles) north of the capital, Baghdad, where the Iraqi government was hosting U.S. Vice President Joe Biden and staging a major ceremony to mark the end of the American military presence in Iraq.

The remaining 13,000 U.S. troops are due to be out of Iraq in the next few weeks, nearly nine years after the invasion that toppled Sunni dictator Saddam Hussein.

According to the witnesses, there was a parked civilian car bomb in the street market and it blew up and led to the deaths of 10 people, said Major Ali al-Temimi of the Khalis police.

A physician at the hospital in Khalis, Dr. Hameed Hussein, confirmed the toll.

The bombing underscored Iraq's fragile security as the United States leaves a rebuilt Iraqi police force and army to cope with a still-lethal al Qaeda-linked Sunni insurgency and Shi'ite militias supported by neighbouring Iran.

Biden arrived in Baghdad late on Tuesday and in meetings with Prime Minister Nuri al-Maliki and other Iraqi leaders hailed a new phase in relations between the two countries, including close security ties.

While violence has fallen sharply in Iraq since the height of the sectarian bloodbath unleashed by the 2003 invasion, militants still kill scores of people every month in bombings and other attacks. October's civilian death toll of 161 was the highest of the year, according to government figures.

U.S. and Iraqi officials have said attacks may rise as U.S. troops withdraw under terms of a 2008 security pact between the two countries.

Iraqi security forces are on high alert for attacks against Shi'ites related to the ongoing religious event of Ashura, which commemorates the death of Prophet Mohammad's grandson Hussein at the battle of Kerbala in 680 and defines Shi'ism and its rift with Sunni Islam.

Last December during Ashura, a bomb exploded near a procession in Khalis, wounding 14 people.

A police source who asked not to be named said the security operations centre for Diyala province, a restive al Qaeda stronghold east of Baghdad, sent a special forces units to take control of the bombing scene in Khalis.

The move highlighted mistrust between Iraqi forces. Local officials often accuse police and military leaders of colluding with militants.

The (special) forces dismissed the police of Khalis from the scene because ... this area was supposed to be a secure and well protected area, the source said. And the question is, how

did this car come to be in the market?

(Writing by Jim Loney; Editing by Louise Ireland)