A medic at the Al-Sadr hospital which was hit said women and children were among the 20 wounded in the strike, which a security official said took place at around 10:00 am (0700 GMT).
The US military confirmed the air strike but said it targeted "known criminal elements".
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"I can confirm that we conducted a strike in Sadr City this morning. The targets were known criminal elements. Battle damage assessment is currently ongoing," a military spokesman told AFP.
Witnesses said the target of the strike, in which US forces dropped several missiles, was a small house adjacent to Al-Sadr hospital and used as a rest area by Shiite pilgrims.
The impact of the strike damaged more than a dozen ambulances belonging to the hospital, one of the three main medical facilities in the district, and also shattered windows of the building, an AFP reporter at the scene said.
© 2008 Agence France Presse