More than 200 people were plucked from waters off Papua New Guinea Thursday after a ferry sank but many others remained missing, with rescuers scouring the area for survivors as night fell.

Operator Star Ships said it lost contact with the MV Rabaul Queen at about 6am on Thursday (2000 GMT Wednesday) while it was travelling between Kimbe and Lae in the east of the Pacific nation, blaming "bad weather" for the disaster.

The PNG National Maritime Safety Authority (NMSA) said it was first alerted by a distress signal early Thursday and confirmed that "the vessel has sunk and passengers are in the waters awaiting rescue".

Rescue co-ordinator Captain Nurur Rahman said more than 300 people were on board the vessel but it was too early to say why the ferry went down, refusing to speculate on whether the ship was overloaded.

"Our priority at the moment is to save lives, but it is an unusual occurrence," he told AFP.

"We've had a few cargo ship mishaps before, but never a ferry."

Australia's Maritime Safety Authority said the Rabaul Queen went down about nine nautical miles (16 kilometres) off the coast and it was helping coordinate the rescue, with 238 people saved so far and eight merchant ships on the scene.

"As at 6:30pm (0730 GMT), our last confirmed report was for 238 survivors," an AMSA spokeswoman said.

An unknown number of people remained unaccounted for, she added.

"Initial reports say (there were) 350 (on board), however three passengers who have been rescued from the water have said the number could be higher than that."

Rahman said the ship had "completely sunk" and rescue efforts would continue as long as possible, although the weather was deteriorating as night fell.

"We'll continue the search as long as we can, it all depends once it gets dark whether we are able to effectively do any search and rescue," he said.

"The weather is also slightly choppy now, more rough and slightly more windy so it all depends on the vessels and the people who are doing the rescue at that stage to make a decision."

A number of the survivors were to be airlifted to hospitals for treatment for dislocated shoulders and other injuries, he said, adding that he had not "heard anything about fatalities".

An Australian search and rescue aircraft with life raft-dropping capabilities was assisting the operation, as well as three local helicopters, with an Orion PC3 military jet and second search aircraft en route, AMSA said.

Australian Prime Minister Julia Gillard earlier described it as a "major tragedy" that had likely claimed a large number of lives.

"Given the likely very high loss of life here, I think when this news comes to the attention of Australians around the country they will be thinking about the people of PNG," Gillard said in the hours immediately after the sinking.

Foreign Minister Kevin Rudd said Canberra stood "ready to offer all necessary assistance."

Australia's foreign office said it had been advised by Star Ships that "they do not believe that there were any foreigners on board", with local reports suggesting that many on board had been students and trainee teachers.

Lae, the ship's final destination, is home to a large university.

It was rocked by a horrific plane crash last October which killed 28 people, most of whom were believed to be parents travelling to graduation ceremonies -- in PNG's worst air disaster.

Martin Mosi, director of the PNG National Disaster Centre, said he was awaiting word on casualties and it was "very difficult to say" what the cause of the ferry sinking may have been.

"Is it weather, is it overloading or is it something to do with the vessel itself? We do not know but that will certainly come to light very soon," he added.

Star Ships, among PNG's largest passenger ship operators, runs regular services to the nation's outlying islands including to New Britain's Kimbe, a popular dive site that attracts tourists from across the world.