Daesh militants were apparently disguised as soldiers, attacked a Hashed al-Shaabi militants allied to Iraq central government in the Hawija region about 300 kilometres north of Baghdad on Sunday evening, the militia force said in a statement.
The paramilitary unit was conducting operations to "arrest terrorists and dismantle sleeping cells" around the city, in the province of Kirkuk.
A Hashed official who asked to remain anonymous told AFP Daesh militants had set up a checkpoint close to Hawija.
They asked the Hashed paramilitaries to stop, get out of their vehicles and stand beside the road, on the pretext of conducting a search.
They then shot the Hashed fighters and fled, the Hashed official said.
Reinforcements arrived too late to stop the attack.
A senior police officer in the province, who also asked not to be named, said most of the bodies had been beheaded.
It was the deadliest attack against Hashed fighters since October when pro-government forces retook Hawija, which was the jihadists' last urban bastion in northern Iraq.
Iraq in December declared victory against Daesh after a years-long battle to retake large swathes of territory the extremists had seized in 2014.
But the Hashed says Daesh has not completely disappeared and that "sleeper cells" have been fighting a guerrilla war against it.