Yonhap news agency said 179 people had been rescued, citing national coastguard officials, leaving 290 unaccounted for. There were six confirmed deaths, including a female crew member and a student. There are concerns the death toll could rise sharply.
The 6,825-tonne Sewol listed violently, capsized and finally sank -- all within two hours of sending a distress signal at 9:00am.
"I'm afraid there's little chance for those trapped inside still to be alive," one senior rescue team official, Cho Yang-Bok, told YTN television as divers struggled to access the submerged multi-deck ferry.
Dramatic television footage showed terrified passengers wearing life jackets clambering into inflatable boats with water lapping over the rails of the vessel as it sank 20 kilometres off the southern island of Byungpoong.
Some slid down the steeply inclined side of the ferry and into the water as rescuers, including the crew of what appeared to be a small fishing boat, pulled them to safety. As night fell, the coastguard said the rescue operation was continuing using floodlights and underwater flares.
"We won't give up, although the situation is extremely worrying," a coastguard spokesman said. Several rescued passengers said they had initially been told to remain in their cabins and seats, but then the ferry listed hard to one side, triggering panic.
"The crew kept telling us not to move," one male survivor told the YTN news channel. "Then it suddenly shifted over and people slid to one side and it became very difficult to get out," he added.
The passengers included 375 students from a high school in Ansan just south of Seoul, who were travelling with 14 of their teachers to the popular island resort of Jeju, Yonhap said. "I feel so pained to see students on a school trip... face such a tragic accident. I want you to pour all your energy into this mission," President Park Geun-Hye said on a visit to the national disaster agency's situation room in Seoul.