A ferry carrying nearly 200 people has caught fire in Indonesia, forcing passengers and crew to jump into the sea.

The KM Karya Indah was headed for the remote island of Sanana in northeastern Indonesia when the fire broke out at around 7am local time, officials said.

Phone video of the incident provided by the National Search and Rescue Agency showed passengers and crew clinging to floating objects as they struggled in the choppy water - while the raging fire on the ferry sent up clouds of black smoke.

Wisnu Wardana, a spokesperson for the sea transportation directorate general, said local fishing boats were used to help rescue all 181 passengers, including 22 children, and 14 crew members.

He said authorities were still investigating the cause of the incident, and that survivors told them the fire apparently started in the engine room around 15 minutes after the vessel had departed Ternate, the provincial capital of North Maluku province.

Ferry accidents are common in Indonesia, the world's largest archipelago nation with more than 17,000 islands. Many accidents are blamed on the lax regulation of boat services.

(With input from agencies)