About 150 people from Somalia and Ethiopia have been rescued from the capsized boat off the coast of Lampedusa, Italian news agency ANSA reported. The boat was carrying more than 500 migrants.
The boat caught fire and sank after someone onboard set a blanket on fire to try to signal nearby fishing boats but inadvertently ignited leaking fuel, the report said.
"We started jumping into the water when the flames got too high," a survivor said. "The fishing boats didn't come and get us."
A fishing boat crew member said no one in the fleet saw the signal. A rescue operation did not get under way until an Italian navy helicopter crew spotted someone in the water, ANSA said.
Italian President Giorgio Napolitano referred to the accident as the "massacres of innocents" and called for nations to come together to fight human trafficking.
Many migrants die each year as they attempt to make what Napolitano called "journeys of despairs" from north Africa to Lampedusa, the closest European island to the African coast.
Fortress Europe, an organization that tracks migration, said more than 6,200 asylum seekers have lost their lives in the Sicilian Channel during the past decade, ANSA reported. At least 1,800 died in 2011.
Thursday's accident demonstrates "the absolute necessity of decisions and action by the international community," he said.
A Tunisian who survived the wreck has been arrested by police on suspicion of being a human trafficker. Other survivors, mostly Somali and Eritrean, identified the suspect as a human trafficker, officials said.
Four children were among the bodies recovered, ANSA reported. Many women also were among the victims in what Italian Prime Minister Enrico Letta called a "huge tragedy."
The boat was believed to have departed Libya.
"It's a horror; it's a horror," Lampedusa Mayor Giusy Nicolini said. "They don't stop unloading dead bodies."
The Italian government declared Friday a day of mourning.