Police said gunmen tried to take control of the area near two sacred shrines, the focal points of the festival.
Unconfirmed reports say 25 people have been killed and more than 60 wounded in firefights between gunmen and police.
Hundreds of thousands of Shi'ite pilgrims are in Karbala for the religious festival, which is due to reach its high point tonight and tomorrow morning. The ceremonies mark the birth of Muhammad al-Mahdi, the 12th and last Shi'ite imam.
In a separate incident on August 27, at least nine people were reported killed in a suicide bomb attack after evening prayers at a mosque in the Iraqi city of Fallujah.
Police said the victims included the mosque's imam, Abd al-Sattar al-Jumaili, who had been on an Al-Qaeda death list.
(compiled from agency reports)