Police said an owner of the Kiss nightclub, the club's head of security and a member of the band Gurizada Fandangueira were being questioned, the BBC reported. A fourth person, believed to be another club owner, was being sought.
More than 100 people were being treated in hospitals.
Brazil declared three days of mourning beginning Monday, when the first funerals for victims were conducted, the BBC reported.
In Santa Maria, a 30-day mourning period was declared.
The country's deadliest fire in five decades reportedly started Sunday after a Gurizada Fandangueira band member lit a prop on stage. A band member said one of group's members died in the fire.
Officials said they were investigating claims that many of those who were killed couldn't escape because only one emergency exit was available, the BBC said.
Officials said most of the victims died of smoke inhalation. The death toll was revised downward from the 245 originally reported.
The government postponed a Monday ceremony in the capital of Brasilia to mark 500 days until the 2014 football World Cup.
President Dilma Rousseff, who returned early from a summit in Chile, met with survivors at Santa Maria's Caridade hospital.
"It is a tragedy for all of us," Rousseff said.
The fire broke out as Federal University of Santa Maria students held a dance at the club. Witnesses said panic spread as people tried to escape.
Mattheus Bortolotto told a local television station, "It was sheer horror. The emergency exits did not work, and then I lost my friend in the confusion. Then a girl died in my arms. I felt her heart stop beating."
One of the nightclub's owners confirmed to police the club's business license had expired, the newspaper Folha de S. Paulo reported.
The club had no fire-prevention plan, which was supposed to have been completed in August 2012, National Secretary of Civil Defense Col. Humberto Viana said.
Some witnesses told local media security guards initially prevented people from leaving, thinking they were trying to skip out without paying their tab. When the guards saw the fire, they helped people escape, witnesses said.
About 2,000 people, mostly students, were in the club -- twice its maximum authorized capacity of 1,000, de Melo said.
The fire started in foam soundproofing after a member of Gurizada Fandangueira lit a flag that reached the ceiling, Civil Defense coordinator Adelar Vargas said.
Guitarist Martins Rodrigo Lemos told the Folha a vocalist and a security person desperately tried to put out the blaze with a fire extinguisher that didn't work.
"The guys tried to extinguish it, but the extinguisher did not work -- nothing came out," Lemos said.
The disaster is among the deadliest of nightclub fires. A fire at a club in Luoyang, China, killed 309 people on Christmas Day 2000. One in Buenos Aires in 2004 killed 194. A fire at a West Warwick, R.I., nightclub in 2003 killed 100 people.