A bomb went off near a city stadium, Khanaqin Mayor Mohammed Mala Hassan told Rudaw.
No group has claimed responsibility for the attack.
Due to the deteriorating security situation, the people of Khanaqin have several times asked for the return of Kurdish security forces, which withdrew under Iraqi army pressure in October.
Khanaqin has been bombed three times in recent months, and kidnappings have become more frequent.
The city of Khanaqin, which has a majority Kurdish population, is located within the disputed areas of northern Diyala province, 240 kilometers southeast of Erbil.
It came under Iraqi control last October when federal forces took over the disputed areas.
