The boat, MV Spice Islanders, sank in an area of deep sea after leaving the mainland port of Dar es Salaam.
It was travelling between Zanzibar's main island, Unguja, and Pemba, both popular tourist destinations.
Hundreds of passengers are still missing, many of them children.
Survivor Yahya Hussein, 15, said: "I realised something strange on the movement of the ship. It was like zigzag or dizziness.
"After I noticed that I jumped to the rear side of ship and few minutes later the ship went lopsided."He said there were many children on the ship.
Another survivor Mwita Massoud said that after the ship began to list, water rushed through the main cabin and stopped the engines.
Many potential passengers had refused to board because it was so overloaded.
Mohammed Aboud Mohammed, the minister for state in the vice president's office, said about 230 people had been rescued so far.
"We appeal for calm to the public," he added.
"The government is doing its best it can to handle the situation. There is no need to panic."
Thousands of residents mobbed the docks of Stone Town on Zanzibar waiting for news, with many of those present expressing anger that the ship had been allowed to leave the port so overloaded.
Some survivors have been brought to shore in fishing vessels, while others have clung to debris in the sea, waiting for assistance.
Authorities are struggling to cope and have asked for foreign help.
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