The captain of the ferry MV Thomas Aquinas ordered the ship abandoned after it began listing and then sank after hitting the cargo vessel, coast guard officer Joy Villegas said.
The coast guard said 17 people were confirmed dead, including children, and 525 had been rescued several hours after the collision. Authorities were still checking the number of others who had been taken to hospitals.
Two coast guard vessels and other nearby ships were involved in the rescue operation not far from the port of Cebu, Villegas said.
Jerwin Agudong said he and other passengers jumped overboard in front of the cargo vessel after the ferry began taking on water and the crew distributed life jackets.
He told radio station DZBB that some people were trapped and he saw bodies in the water.
"It seems some were not able to get out. I pity the children. We saw dead bodies on the side, and some being rescued," he said.
"One of the persons who jumped with us hit his head on metal. He is shaking and he is bloodied," Agudong said.
The 138-metre-long ferry sank in about 30 minutes, he said.
The youngest among those rescued was an 11-month baby, news reports said.
The ferry came from Nasipit in Agusan del Sur province in the southern Philippines on a daylong journey, Agudong said.
Accidents at sea are common in the Philippine archipelago because of frequent storms, badly maintained boats and weak enforcement of safety regulations.
In 2008, the ferry MV Princess of the Stars capsized during a typhoon in the central Philippines, killing nearly 800 people.
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