Jusuf Kalamperovic, the Montenegrin interior minister, said the train had been travelling from the northern town Bijelo Polje to the capital Podgorica when it derailed and rolled 30 metres down a ravine around 5pm local time.
Kalamperovic said brake failure is the suspected cause of the crash and said a "thorough investigation" would be conducted into the accident.
Witnesses said about 300 people were on the train, among them many children returning from a ski trip in northern Montenegro in the Balkans.
Army and police helicopters hovered over the crash site as access to the many injured was difficult in high winds. Trees halted the slide of the train coaches 40 metres from the water.
"It is very difficult to get the victims out ... the terrain is rough, it is very dark. There are a lot of dead"
Nebojsa Kavaric, Podgorica medical centre
Nebojsa Kavaric, the director of the Podgorica medical centre, said: "We took out a large number of wounded. It is very difficult to get the victims out ... the terrain is rough, it is very dark. There are a lot of dead."
A taxi driver helping with the rescue effort told reporters that he saw seven or eight bodies in one spot alone as well as many more injured. Tanjug earlier said about 100 people were admitted to hospital.
Filip Vujanovic, the president, and Milo Djukanovic, the prime minister, rushed to the crash site in a gorge of the Moraca river.
"A terrible tragedy happened at Bioce and everything is being done to reduce the number of casualties as much as possible," Vujanovic said.
"The whole republic has been mobilised to save lives. We are all hoping that this terrible accident will have as few casualties as possible."
Medical services issued an appeal for blood donors.
One passenger said he thought the train's brakes had failed.
Ivan Stanic, who was in a coach that stayed on the rails inside a tunnel said "we were lucky because of the tunnel".
"Luckily, I was in the last wagon. Those up front were critical," he told reporters.
A policeman at the scene said four wagons had jumped the tracks. Ranko Medenica, the railways chief said "the four wagons were full of passengers".