At least two people were killed and another 36 wounded when a large bomb exploded in Iraq's Kirkuk city outside a bank where police were collecting their salaries, police and hospital officials said on Thursday.

Local television showed black smoke coming from the site in Kirkuk city centre where emergency workers helped the wounded into ambulances. One dead body lay in the street near the wreckage from the attack.

Kirkuk, 250 km (155 miles) north of Baghdad, is ethnically divided among Iraqi Arabs, Kurds, and Turkmen and its disputed status makes it a potential flashpoint for conflict when US troops prepare to withdraw at year-end.

Violence has fallen sharply in Iraq since the sectarian strife in 2006-2007, but Sunni Islamist insurgents and Shi'ite militias still carry out daily bombings and assassinations.

Attacks this year have often targeted local government offices or Iraqi security forces. Insurgents have tried to destabilise Prime Minister Nuri al-Maliki's power-sharing government, which is split among Shi'ite, Sunni and Kurdish blocs.