The ferry, MV Salama, set sail from the mainland Tanzania at around midday heading to Zanzibar, Tanzania's semi-autonomous archipelago and a popular tourist destination.
"The ferry is bottom-up, and rescue operations are ongoing. So far we have not confirmed any deaths," Said Khamis, a safety officer at the Zanzibar Port Corporation, told Reuters.
MV Salama, or peace in the local Swahili language, was carrying 250 adult passengers and 31 children, police said.
It was still unclear what caused the accident near Chumbe island, west of Zanzibar, police said.
The ferry is owned by a company named Seagull, which also runs a number of other ferries.
More than 200 people were killed when a crowded ferry sank in September off the coast of east Africa in the worst maritime disaster in the history of Zanzibar.
(Reporting by Ally Saleh; Editing by James Macharia and Alison Williams)
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