"Rubber dinghy sunk north of Tripoli. At least 25 people died in the incident, exact numbers still unclear. Italian navy on the scene," the German charity Sea Watch said on Twitter.
The Italian coast guard told AFP 85 people had been rescued from the sinking vessel, and eight bodies recovered so far.
It was believed to be the first shipwreck of 2018 -- though rescue organisations say countless dinghies attempting to cross the Mediterranean are likely to sink without a trace, meaning the year's death toll may have begun even earlier.
"Shipwreck off the coast of Libya, east of Tripoli. Dozens of people missing who will die without a burial," tweeted the Spanish charity Proactiva Open Arms.
Sea Watch said it had been alerted to the disaster by the coast guard, which believed 150 people had been aboard.
"The search continues for survivors," said the coast guard, which was aided in the rescue by a navy vessel.
Last year, 3,116 people died trying to cross from North Africa to Europe, according to Doctors Without Borders.
While migrants who made the perilous journey across the Mediterranean in rickety boats still numbered nearly 119,000, it was a roughly one-third drop over the previous year.
The drop has been attributed to a controversial combination of an Italian-led boosting of the Libyan coastguard's ability to intercept boats and efforts to seek the assistance of powerful militias.
In the first six days of 2018, over 400 people have been brought to safety in Italy, the interior ministry said, compared to 729 in the same period last year.
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