(Adds Baghdad car bombing)

MAHMUDIYA, Iraq, April 8 (Reuters) - A car bomb killed 17 people and wounded two dozen in a town south of Baghdad on Sunday, the latest in a spate of attacks outside the Iraqi capital since a new security plan took effect there.

The bombing came as thousands of Iraqis streamed to the holy southern city of Najaf to heed a call by fiery Shi'ite cleric Moqtada al-Sadr for a massive anti-American protest on Monday.

Sadr -- who blames the U.S.-led invasion for Iraq's unrelenting violence -- has urged Iraqis to protest on a day that coincides with the fourth anniversary of when American forces swept into central Baghdad in 2003.

The mayor of Mahmudiya, Muaid al-Amiri, said the car bomb killed 17 people.

It targeted industrial workshops and largely destroyed a three-storey building. Many smaller shops were levelled.

"Three of us and a young boy were sitting in a store selling spare parts for cars when there was a huge explosion. Debris from the roof fell on me," said one wounded man, who gave his name as Sadeq, lying on a hospital bed in the town, 30 km (20 miles) south of Baghdad.

North of Baghdad, four U.S. soldiers were killed in an explosion near their vehicle on Saturday, the military said.

It said the blast took place in Diyala province, another area where violence has spiked since the start of the U.S.-Iraqi security crackdown in Baghdad.

What largely began as a Sunni Arab insurgency against U.S. and Iraqi forces following the 2003 invasion of Iraq has since transformed into a bloody sectarian conflict between Shi'ites and once dominant Sunni Arabs.

Tens of thousands of Iraqis have been killed in the past year alone. More than 3,270 American soldiers have been killed since the U.S.-led invasion.

Pope Benedict, in his Easter message, lamented the "continual slaughter" in Iraq.

"Nothing positive comes from Iraq, torn apart by continual slaughter as the civil population flees," the Pope said.

BAGHDAD VIOLENCE DOWN

The U.S. military said violence had dropped in Baghdad under the new offensive, with a 26 percent decline in "murders and executions" between February and March, and a 60 percent fall between the last week of March and the first week of April.

"We are encouraged by the positive signs ... but there is still a long way to go ... We are still at the beginning of this plan," chief U.S. military spokesman Major-General William Caldwell told a news conference in Baghdad.

Underlining the hurdles ahead, a suicide car bomb in southern Baghdad killed seven people, police said.

U.S. President George W. Bush is sending 30,000 additional American troops to Iraq, mainly for the Baghdad push. All reinforcements will have arrived by the end of May.

Thousands of supporters of the firebrand Sadr boarded buses and rode in cars to the holy southern city on Sunday.

The Baghdad-Najaf road was packed with hundreds of vehicles crammed with passengers waving Iraqi flags and chanting religious and anti-U.S. slogans.

"No, no, no to America ... Moqtada, yes, yes, yes," they chanted as they converged towards Najaf.

The U.S. military says Sadr is in neighbouring Iran. His aides insist the young cleric is in Iraq and have denied suggestions he fled to Iran to escape the new crackdown.

In a possible diplomatic embarrassment for Iraq, Iran refused to allow a plane carrying Prime Minister Nuri al-Maliki on a trip to Asia to cross its airspace overnight, a senior adviser to the Iraqi leader said.

Sadiq al-Rikabi, accompanying Maliki on the trip to Japan and South Korea, said the plane was forced to fly to Dubai where it stayed for more than three hours to file a new flight plan.

Asked about the report, Iranian Foreign Ministry spokesman Mohammad Ali Hosseini told a weekly news conference in Tehran: "Permission for Maliki's flight is a normal issue. All flights need permission." He gave no further details.

Iraq's U.S.-backed government has often had to tread a delicate path in trying to maintain good relations with both Iran, its neighbour to the east, and the United States.

(Additional reporting by Ahmed Rasheed, Aseel Kami, Yara Bayoumy, Ross Colvin and Mussab Al-Khairalla in Baghdad)

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