The accident occurred at 3:30 am (0130 GMT) on the road from Diwaniyah province to the holy shrine city of Najaf.
Najaf is home to the shrine of Imam Ali, the fourth Islamic caliph and relative of the Prophet Mohammed.
"Seven people -- four men, two women and a girl -- were killed and 42 were wounded, including two in critical condition," said Amer al-Kinani, the media officer of the Diwaniyah health department.
The casualties include passengers from both the bus and the car, Kinani told AFP.
The bus carried Iraqi pilgrims, including women and children, when the "horrific accident" took place, a rescuer in Diwaniyah said.
A police source in Diwaniyah who confirmed the toll added that the passengers were pilgrims from the southern province of Basra.
The sources requested anonymity as they were not allowed to speak to the media.
Millions of Shiite pilgrims from Iraq and around the world travel to Najaf and its twin holy city of Karbala throughout the year.
Road accidents are recurring in oil-rich Iraq where conflict, neglect and endemic corruption have left the infrastructure, including roads and bridges, in disrepair.
Officials also say speed, mobile phone use and driving while impaired contribute to crashes.
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