Mochammad Badrus, a local police chief, said there had been 146 passengers on board, 120 of whom were rescued while 26 bodies were found.
Phone reception rush
Quoting survivors, Badrus said the Acita III tipped over after passengers rushed on to its upper deck to get mobile phone reception as the ferry approached land.
A spokesman for Bau Bau hospital on Buton island told AFP that 29 people had died as the ferry went down with people trapped in it.
"Twenty-nine people have died. The bodies were received from midnight last night until 8am this morning. Nineteen survivors are being treated for shock," Laode Hamdansyah said.
According to local radio station Elshinta, the ferry with 151 people on board sank just 500 metres from shore near Bau Bau, where residents heard cries for help.
Roki Asikin, the search and rescue team chief told Elshinta that 125 people had been rescued "but we do not know how many people were aboard the ship, so we don't know how many people are still missing".
Ferries are a main source of transportation in Indonesia, a vast archipelago of more than 17,000 islands with a population of 220 million.
The Acita III accident is the latest in a string of disasters in a country where overcrowding and poorly enforced safety standards are common causes of transportation tragedies.