The attack on the Iraqi army base, called Tamarat, near the town of Tal Afar, close to the Syrian border, was the deadliest single attack in Iraq since the January suicide attack on police recruits in Ramadi.
"Forty people have been killed, and 20 wounded, when a suicide bomber blew himself up in the midst of candidates waiting at the army recruitment centre," an interior ministry official said.
Last week US President George W Bush had cited Tal Afar, which last year was the scene of major joint US-Iraqi operations, as a model for coalition efforts to create a stable Iraq.
The attack came as the US military defended itself against charges that it had killed over a dozen Shiites in an operation against a Baghdad mosque.
Amid a swirl of conflicting versions of the events of Sunday, the US military said Iraqi special forces raided a meeting hall in north-east Baghdad being used by an insurgent cell and killed 16 people and detained 18 others.
Iraqi television showed images of blood stained corpses inside a Shiite prayer hall with most of the dead appearing to be elderly. Their identity cards proclaimed them to be members of prominent Shiite political parties.
The Imam Ali Hospital, in nearby Sadr City, reported 17 dead and five wounded in an incident that risks further inflaming tensions in Iraq.
"Iraqi commandos and soldiers from the Iraqi counter-terrorism force killed 16 insurgents and wounded three others during a house-to-house search on an objective with multiple structures," said the US military.
The statement added that the Iraqi special forces "received fire almost immediately from several buildings near the target area."
The US military admitted that members of the US special forces were present in an advisory capacity and said that "no mosques were entered or damaged during this operation."
The statement added that the meeting house was the headquarters of an insurgent cell linked to attacks on coalition and Iraqi forces as well as kidnapping Iraqi civilians.
Large numbers of weapons were found, including dozens of assault rifles, rocket propelled grenades and launchers, two heavy machine guns and material to make explosives.
A dental technician with the Ministry of Health who had been taken hostage the day before was also rescued. He had been tortured for the last 12 hours, reported the US military.
Hazam al-Aaraji, a high ranking official in radical Shiite cleric Moqtada Sadr's movement, flatly denied the US version of events.
"This is a lie; we saw unarmed worshippers and we didn't find any Iraqi weapons. This place was just for praying and worshipping and it included different groups of Shiites, including not just Mehdi Army but Dawa Party as well."
Aside from full scale battlefield conflict like the re-taking of Fallujah in November 2004, US forces have a strict policy of not entering or attacking mosques. Iraqi forces are brought in if such a building needs to be investigated.
On Monday morning, the bodies were moved from the hospital and placed in coffins before being loaded into pickup trucks for the journey to the cemetery in the holy city of Najaf where Shiites prefer to be buried.
The incident comes at a particularly tense time with a rising tide of corpses from sectarian killings and the US putting increasing pressure on Iraq's political factions to form a long awaited national unity government.
On Monday, police discovered nine more corpses dumped in an empty lot used to sell used cars. The bodies had all been killed by strangulation.
In violence around Baghdad two bombs killed a total of three people.
At the end of meetings on Sunday, Iraq's political factions were still deadlocked over the issues of forming a new government. Talks resumed on Monday.
Izzat al-Duri, the No 2 in Iraq's Revolution Command Council in Saddam Hussein's fallen regime and is its highest ranking official, urged Arab leaders at the ongoing Khartoum summit to consider the Iraqi resistance as the Iraqis' "legitimate representative", the Qatar-based Jazeera satellite news channel said.
"Your upcoming conference should take a courageous, frank and clear decision to recognise the valiant nationalist Iraqi resistance as the sole legitimate representative of Iraq's people," said a taped voice attributed to Duri.