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BAGHDAD, Jan 16 (Reuters) - A female suicide bomber wearing a vest packed with explosives killed eight people in an attack on a crowded market in a mainly Shi'ite town in Iraq's volatile Diyala province on Wednesday, police said.

Another seven were wounded in the attack in the small town of Khan Bani Saad near Baquba, the capital of Diyala province 65 km (40 miles) north of Baghdad.

Suicide attacks by women are relatively rare in Iraq, although there has been a handful of such bombings in recent weeks. A female bomber killed 10 people in Baquba on Jan. 2.

The U.S. military this month launched a new offensive aimed at driving Sunni Islamist al Qaeda out of religiously mixed Diyala. On Monday the military said 60 militants had been killed during the week-long offensive.

That operation was part of a wider offensive, known as Operation Phantom Phoenix, in restive provinces north of Baghdad as well as the capital's southern outskirts, where Sunni Arab militants have regrouped after being driven out of other areas.

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