The violence is part of a sustained campaign of militant attacks this year that has prompted fears of wider conflict in a country where ethnic Kurds and Shias and Sunnis have yet to find a stable power-sharing compromise.
Medics said they had received the corpses of six men and one child following the attack in the Bab Laqash neighbourhood of Mosul, 390 km north of the capital Baghdad.
"We used to go to this teahouse after prayers. Tonight when we got close to it we heard a big explosion inside. At first we thought it was a gas cylinder, but police told us it was an explosion. We saw smoke and flames coming out," 45-year-old witness Haj Hassan said.
It was not clear who was behind the attack, but insurgents Islamic State of Iraq, have been regaining strength in recent months, security sources say.
Some 460 people have been killed in militant attacks so far in July, according to violence-monitoring group.
Increasing bloodshed has stoked fears that Iraq is sliding back into all-out conflict, though it has yet to match the sectarian carnage of 2006-07 when monthly death tolls sometimes topped 3,000.
On Thursday, the United Nations envoy to Iraq, Martin Kobler, said the country risked going down a "dangerous path, potholed with sectarian violence at each turn, leading to increased instability".
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