The fire started about 4.15 am on Wednesday while the Putri Yasmin ferry was on the way from Padang Bai port in Bali to Lembar port on the neighbouring island of Lombok in West Nusa Tenggara province, according to the search and rescue office in Mataram, the provincial capital.
The agency received an emergency report almost half an hour later and immediately deployed personnel and rescue vessels.
"Our top priority is the safety of all passengers and crew members," said Muhammad Hariyadi, who heads the Mataram Search and Rescue Office.
Initial reports said the ferry was carrying 131 people, including 17 crew members, based on the ship's manifest, when the fire broke out in the Lombok Strait.
However, hours after the incident, officials said more people were aboard than listed.
It is common in Indonesia for the number of passengers on a boat or ferry to differ from the manifest.
The ferry was also transporting 44 vehicles and 53 motorcycles.
The National Search and Rescue Agency, or Basarnas, said rescuers evacuated 172 people from the burned vessel, including 2 Australian tourists, and recovered the body of a 19-year-old Indonesian girl.
Syamsurizal, head of the Lembar Port Authority, said at least two injured passengers were rushed to a nearby hospital.
"The response operation is ongoing, and authorities are continuing to account for all victims," said Syamsurizal, who like many Indonesians uses a single name.
Hariyadi said the rescue effort was supported by Indonesian navy ships, patrol boats and rescue vessels, and a helicopter to make an aerial survey. He said rough seas with waves reported as high as four metres complicated rescue efforts.
Wednesday's incident happened less than two weeks after another Indonesian ferry, the Mutiara Sentosa 2, caught fire in waters off the main island of Java, leaving at least five people dead.
Indonesia is an archipelago of more than 17,000 islands where ferries are a common method of travel.
Disasters occur regularly, with weak safety enforcement often blamed.
10°C