The two car bombs exploded at nearly the same time, killing and wounding many.
Some small arms fire broke out after the explosions, and ambulances wailed on their way to pick up the many injured.
The bombs went off at mid-day, when the Haraj market was filled with traders selling used electronic goods, clothing, and medicines.
North of Baghdad, a bomb killed at least 12 people in a market near Baquba.
The bombings may be a sign of a renewed campaign of Sunni insurgent violence against Shi'ite targets.
U.N. officials say sectarian violence killed an average of 94 Iraqis every day last year. In an effort to stop the carnage, the United States is sending an additional 20,000 troops to Iraq, with most of them slated to come here to Baghdad.
More than three-thousand elite American troops from the 82nd Airborne Division arrived in the city during the past couple of days.
The new strategy is controversial in the United States, and Mr. Bush is expected to discuss the Iraqi situation in his State of the Union speech Tuesday.
In a newspaper interview with USA Today, Mr. Bush said he will not set a timetable for withdrawing troops from Iraq, because that would allow insurgents to adjust their tactics.
Insurgents showed new tactics on Saturday as they used uniforms and vehicles that closely resembled those used by U.S. officials and forces to bluff their way into a meeting 80-kilometers south of Baghdad and kill five U.S. soldiers.
U.S. and Iraqi military officers reported the results of a separate battle Monday. This is U.S. Captain Steve Dobbins:
"As far as the enemy that we were faced with, this was a well-trained, well-determined Wahabist/al-Qaida terrorist group. They are not the normal insurgents we have seen, these men move in squad formations, take care of their weapons systems, and are good marksmen."
Captain Dobbins commands a company of U.S. soldiers, part of a much larger coalition force that has been fighting alongside Iraqi troops in Diyala Province. Officials said the combined Iraqi-U.S. operation defeated their adversaries in a series of battles.