Shiite religious leaders blamed the attack on Sunni loyalists of Saddam Hussein.
"We hold Takfiris (Sunni extremists) and Saddamists directly responsible for this horrible crime," they said in a statement.
The long-standing tensions between Iraqi Shiites and Sunnis first turned violent on Feb. 22 when Sunni's bombed a Shiite shrine in Samarra. Thursday's attack was the bloodiest since July 18 when 59 died at another bombing at a Shiite shrine in Kufa.
Thursday's bombing occurred in front of the Imam Ali mosque, one of the world's most sacred shrines for Shiite Muslims. The building contains the remains of Prophet Muhammad's son-in-law, Ali.
The bomb was detonated at 10:30 a.m. at the security check point outside a market near the mosque's entrance.
Shakir Obeid Hassan, who was injured in the blast, described the scene to the Associated Press: "Before I reached the checkpoint, only a few (feet) from the shrine, I heard a huge explosion. Something hit me on the head and I fell. I couldn't hear for a while but I saw bodies and human flesh everywhere."
Prime Minister Nouri al-Maliki condemned the attack, describing it as a "barbaric massacre conducted by Takfiris and Saddamists who are seeking to inflame sectarian" passions. The prime minister is a Shiite, like the majority of Iraqis.
Located 100 miles south of Baghdad, Najaf is a major site for Shiite pilgrims from around the world, especially Iran, which is predominantly Shiite Muslim. Iran's former leader, Ayatollah Ruhollah Khomeini lived in Najaf as an exile. Hezbollah's current head, Hassan Nasrallah studied there.
In other violence, 18 people were killed across the country, most of them in Baghdad. Four of those were police officers killed in a gunfight with insurgents.
Five anonymous bodies also were found Thursday.
Iraq's national security adviser Mouwaffak al-Rubbaie said police arrested 20 al-Qaida members and killed one in recent days.