The Sunni militant group ISIS claimed responsibility for the attack.
Rudaw's reporter on the scene said police were defusing a device after the initial explosion.
Khanaqin is a territory disputed between Baghdad and the Kurdistan Region which has seen ongoing threats from ISIS remnants.
Arbaeen is a Shiite Muslim religious observance. More than 10 million visitors have travelled to Karbala to mark the occasion.
Last updated 11.29 p.m.
