Twenty-five people were killed and dozens injured when two passenger boats collided and one sunk off Hong Kong late Monday, officials said.

The passengers of the stricken boat had been on their way to watch a huge fireworks display in Hong Kong harbour when their boat collided with another ferry, filling with water and quickly sinking, fire service officials said.

More than 120 passengers and crew were on the boat, which went down off Lamma island, some three kilometres (two miles) from Hong Kong island, sparking a major rescue operation.

"A vessel collision incident involving two passenger vessels occurred at the seafront of Lamma Island last night," a Fire Services Department (FSD) statement said.

"(The) Fire Services Department received the call at 8:23 pm and arrived at scene at 8:41 pm. As at 3:00 am today FSD has rescued 123 passengers from the sinking vessel. Among them, 17 were certified dead at scene while eight others were certified dead upon arrival at hospitals.

"Over 100 people were sent to five hospitals during the incident, nine of them have sustained serious injuries or are in critical condition."

The FSD said the rescue operation was hampered by darkness and "many obstacles onboard".

"Rescue action will continue overnight as FSD cannot rule out that there are still people inside the vessel or missing," the statement said.

A Hospital Authority spokesman earlier said eight people had been killed in the collision.

Rescue teams in boats and helicopters spent the night scouring the sea around the site of the accident for signs of survivors, while dive teams entered the sunken boat.

Survivors were taken by boat to Hong Kong island, where a fleet of ambulances whisked them to several hospitals.

Local television station RTHK reported on its website that children were among the dead.

Hong Kong chief Leung Chun-ying said the government had mobilised all its resources to respond to the accident.

"All our emergency rescue teams are concentrated there... We can see that bit by bit, the people in the water are being rescued," he told reporters at a pier as the injured were being put into ambulances.

Later, after visiting a hospital where a number of those hurt had been taken, he said: "Government divers have entered the submerged portion of the boat to rescue survivors, passengers or crew members.

"We will investigate this incident, we must understand the reason for this incident."

A representative from Hong Kong Electric told RTHK news website the power company had been ferrying 124 passengers and crew to watch fireworks in Victoria Harbour when the collision with a regular passenger ferry, operated by the Hong Kong and Kowloon Ferry company, occurred.

Survivors told how the water level inside the boat being used by HK Electric rose quickly before the vessel sank, RTHK reported, leaving only its bow protruding from the water.

Hong Kong Electric's Director of Operations S.S. Yuen confirmed the passengers were on their way to the fireworks display, to celebrate China's National Day, telling reporters: "This is a very happy holiday and it turned out to be such a tragic incident."

The FSD said 28 boats and two helicopters and 20 ambulances were involved in the rescue operation.

Lamma island is the third largest island in Hong Kong, with a population of around 5,000 people. It is popular with expats, who enjoy its car-less narrow streets and laid-back lifestyle.

Police said the cause of the accident was not yet known.