Two suicide bomb attacks outside a mosque killed 39 people during a Shia religious ceremony in the southeastern Iranian city of Chabahar.
Jundollah, a Sunni Muslim rebel group, claimed responsibility on its website for the bombings.
More than 100 people were injured outside the Imam Hussein Mosque in Chabahar, near Iran's border with Pakistan and Afghanistan.
The poor province of Sistan-Baluchistan has been the scene of unrest with the mainly Sunni population claiming discrimination by the Shia authorities.
The bombings killed many children and women, who attended a Shia religious ceremony to commemorate the death of Prophet Mohammad's grandson Hussein, state television reported, adding that the death toll was expected to increase.
Iran's Interior Minister Mostafa Mohammad-Najjar told state television the attackers had links to neighbouring Pakistan and that an investigation was under way.
'A group of terrorists who were trained in Pakistan carried out the bombings...we have informed Pakistani officials as well,' he said.
Jundollah meanwhile said the attack was in retaliation for the execution of its leader Abdolmalek Rigi in June.
'This operation was in revenge for the execution of the leader of the movement Abdolmalek (Rigi) and other martyrs of Jundollah who were savagely hanged,' the group said on its website.
The website carried the names and photographs of two young men identified as the suicide bombers and said they targeted the 'regime's mercenaries and Revolutionary Guards.'
US President Barack Obama condemned what he said was a 'disgraceful and cowardly act.'
'The murder of innocent civilians in their place of worship during Ashura is a despicable offense, and those who carried it out must be held accountable,' he said in a statement.
Iran has faced a string of blasts in past months, including two in June that killed 27 people in the same province. Jundollah had also claimed responsibility for that attack.
Bombings and clashes between security forces, ethnic Baluch Sunni insurgents and drug traffickers have increased in recent years in the area.
