A South Korean passenger ship carrying 477 passengers slowly sank off the southern coast killing at least two people while about 300 on board remain unaccounted for.

South Korea's government has said 295 people were missing several hours after the ferry sank, raising fears hundreds of children could be trapped inside the vessel.

Initial reports had said rescuers plucked 368 people from freezing waters as the passengers, mostly school students, jumped out when the vessel started sinking.

There were 325 students on board the 6,325-tonne vessel, which capsized fully in about two hours.

"There are around 450 people on board and we have coastguard vessels, commercial ships in the area, as well as helicopters all engaged in the rescue operation," said a coast guard spokesperson.

The ferry, identified as Sewol, was en route to the southern resort island of Jeju from the port of Incheon.

Local reports say one woman, a crew member, and a student have been confirmed dead and rescue measures are ongoing four hours after the ship sent distress signals.

The cause of the mishap remains unknown and weather was said to be clear.

An unnamed student who was onboard the vessel told local media: "Currently, I am in the middle of being rescued. At the time, the ship was turning on its side, and none of us were moving as we were told not to move as it was dangerous."

"So, I am not well aware of the situation, but I am told that my friends and other friends could not escape as the passage was blocked. It seems that there are many students who could not get out as the passage was blocked by water."