Officials warned the death toll could rise after the Hercules C-130 came down in Medan, a city of two million on the island of Sumatra, leaving buildings severely damaged and cars reduced to flaming wrecks.
A major rescue operation swung into action, with ambulances ferrying bodies from the accident site, and crowds of anxious residents gathering around a police cordon to get a look.
Novi, who works at an international school near the accident site and goes by one name, said she heard the aircraft and from her office window saw it flying very low before it crashed.
Thirty-eight bodies, including a child, had so far been brought to a hospital in Medan, said Eko Triandi, a Red Cross official who was assisting emergency teams at the hospital.
"Based on reports, there are many victims still in the field," he said.
The military has said the plane was carrying 12 crew members. It was not clear how many of the victims were from the plane and how many were on the ground.
The crash was in a newly built residential area and officials said it was unclear how many people were in the buildings at the time of the accident.
"The bodies have been crushed by debris of the buildings and the fuselage," said local police chief Mardiaz Dwihananto, adding they were being ferried one by one to hospital.
Military spokesman Fuad Basya said the plane took off at 12:08 pm (0508 GMT) from an air force base and crashed in the city about two minutes later, about five kilometres from the base.
Medan is the biggest Indonesian city outside the main island of Java and a major economic centre.
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