The Coast Guard said in a statement that the migrants' 20-meter vessel may have overturned because migrants rushed to one side of the craft when they saw a Portuguese merchant vessel approach it late last night.
The cargo ship had been dispatched to come to the migrants' aid.
The Coast Guard said at least 28 survivors had been rescued by this morning. Maltese Prime Minister Joseph Muscat put the number of survivors at 50.
Muscat said rescuers were seeing people in the sea and were "checking who is alive and who is dead."
The capsizing of such a crowded boat represented the "biggest human tragedy of the last few years," Muscat said.
A United Nations refugee agency spokeswoman Carlotta Sami tweeted that according to one survivor, the boat had set out with 700 migrants aboard.
But the Coast Guard and other authorities said they had no immediate way to determine how many were aboard or how many might still be rescued. The total number of passengers was expected to be clarified as officers interviewed survivors. Given the depth of the sea, as deep as 5 kilometers or more in the area, it was possible that many bodies would never be recovered.
Pope Francis was among those following the news. "There are fears there could be hundreds of dead," Francis told the faithful in St Peter's Square.
He bowed his head in silent prayer as did many of the tens of thousands in the crowd. For a second day running, he called on Europe to do more to help Italy manage its continent-leading flow of migrants.
Italian Premier Matteo Renzi summoned his top ministers to meeting tonight in Rome to discuss the latest tragedy.
Rescuers reported seeing wreckage in the sea.
"There are large fuel stains, pieces of wood, life jackets," Italian Border Police Gen. Antonino Iraso, whose force has boats deployed in the rescue effort, told Sky TG24 TV.
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