The Mutiara Timur I carrying 236 passengers and 35 crew members caught fire in the Bali Strait, about 1.5km from Karangasem Beach.
Dozens of rescue forces members, Navy sailors and local fishermen are trying to rescue those in distress, bringing them to 2 Navy ships. There were no immediate reports of casualties, said Bali's search and rescue chief, Gede Darmada.
"We are still focusing on rescue efforts," he said. The cause of Indonesia's latest passenger train fire is still under investigation.
Many images and videos released by the Indonesian National Search and Rescue Agency show rescue forces trying to rescue victims while black smoke rises from the burning passenger ship.
The passenger ship in distress was moving from the port of Lembar in the Western province of Nusa Tenggara to the town of Ketapang in Eastern Java, according to Darmada.
Ships are a common means of transportation in Indonesia. The AP said that marine accidents often occur in the country of more than 17,000 islands in Southeast Asia. The cause of accidents is often overloaded or not meeting safety standards.
In 2018, a overloaded ship carrying about 200 passengers sank in a large lake in North Sumatra province, killing 167 people. One of the worst such such such tragedies in Indonesia was the sunken overloaded passenger ship in February 1999. The ship was carrying 332 people but only 20 people survived.