The tremor, with a magnitude of 6.4, centred on the town of Zerand, about 700km southeast of Tehran.
It revived painful memories of the devastating quake just 14 months ago in the nearby desert citadel city of Bam that killed 31,000 people.
Distraught and weeping villagers carried dead bodies wrapped in bloodied blankets and bed sheets, and dug with their bare hands through ruins in search of friends and relatives.
Hampered by heavy rainfall, relief teams raced to reach remote villages on the side of snow-capped mountains and provide shelter for thousands of people left homeless.
"Some areas are still inaccessible," Kerman province governor Ali Karimi told state television. "Our priority is to give those affected tents and heating and shelter as soon as possible."
Karimi put the official toll at 289 but said it was bound to rise.
Masud Ghadipasha, head of the Kerman province forensic medical department, said 384 burial permits had already been issued and another 18 bodies had yet to be identified.
"It's at 1800 metres here. It's cold and has been raining. There's no shelter, nowhere for people to stay"
Unicef representative in Iran
Another local official said nearly 400 had been killed.
"It's completely devastated. There's almost nothing left of the buildings," Kari Egge, Unicef representative in Iran, said from Douhan village, about 20km from Zarand.
Egge said locals estimated at least 200 died in Douhan alone. "There are still people unaccounted for, that's for sure," she said.
While the mud-brick villages crumbled in the early morning tremor, major towns and cities in the area escaped heavy damage, meaning the toll would not match the many thousands killed in Iranian quakes in the past, officials said.
Following Islamic tradition, villagers immediately began burying their dead.
"I saw four children, wrapped in blankets, being buried," said a Reuters photographer in another village.
"My whole family is dead," one man cried in images broadcast on state television.
Iran is located in an earthquake-
Egge said survivors would need to move to nearby towns and villages to find shelter before nightfall.
"It's at 1800 metres here. It's cold and has been raining. There's no shelter, nowhere for people to stay."
Some 40 villages, which had a combined population of about 30,000 people, were affected, local officials said.
Groups huddled together in the rain, striking their heads and chests in grief. Some picked through the ruins of rubble and twisted corrugated sheeting in search of belongings.
Others sat silently weeping in front of what used to be their homes.
Television showed nurses wiping blood from the faces of children in cramped and chaotic hospital hallways.
"My whole family is dead"
Zarand resident talking
Some of the injured were taken by train to Kerman where bandaged and crying children clutching bags of serum stood at the railway station.
But Tehran said it had no need for international assistance.
The UN Office for the Coordination of Humanitarian Affairs agreed that local authorities, backed by the Iranian Red Crescent had the relief effort under control.
"It should be noted that both the government and the [UN] agencies were mobilised almost immediately after the disaster occurred and that coordination mechanisms were well in place - a good lesson learned following the Bam experience," it said.
No major oil or gas production facilities are located in the affected area of Opec's second-largest oil producer.
The country is criss-crossed by major fault lines which make it one of the most earthquake-prone countries in the world.