O'Connor also said Amsa's Rescue Co-ordination Centre received a distress signal reporting that a ship had a hole in its hull and was taking on water in rough seas.

Air Chief Marshal Angus Houston, the chief of the Australian Defence Force, told the Australian Associated Press that a Taiwanese trawler had been first to get to the scene late on Sunday night.

"When the first ship got there this vessel was still intact," he said.

"Somehow or other during the process of the interaction between the ship and the trawler, and also the stricken vessel, there's been a capsize," he added.

By the time the merchant ship, the LNG Pioneer, arrived, the boat had already sunk, Houston said.

Asylum seeker surge

The Australian newspaper cited sources as saying that the vessel was almost certainly carrying asylum seekers, but O'Connor said it was too early to say if that was the case, stressing that efforts were focused on the rescue mission.

Some 35 boats with asylum seekers have arrived in Australian waters this year [AFP]
The sinking does come, however, as Australia is seeing the biggest stream of asylum seekers in seven years, a surge the government blames on the conflicts in Afghanistan and Iraq, as well as the end of Sri Lanka's decades-long civil war.

About 35 boats carrying about 1,770 asylum seekers have arrived in Australian waters this year.

Seventy-eight Sri Lankan asylum seekers are currently refusing to leave an Australian customs boat off Indonesia.

And up to 250 Sri Lankans caught on a boat en route to Australia are refusing to leave their ship anchored off Java.

The government dismantled tough immigration and asylum laws after its 2007 election win, closing down detention centres in small Pacific island countries and saying that detention would only be used for security.

But it has increased ships and aircraft patrolling the remote north coast to intercept boats before they reach Australian soil.

Australia has also continued processing refugees at a detention centre on Christmas Island in the Indian Ocean, even boosting capacity there by hundreds of beds.