On Thursday afternoon, coastguard chief Felicio Angrisano said in a statement that 94 people had died, with rescue divers later saying they had identified at least 40 more bodies in and around the sunken wreck at a depth of around 40 metres (130 feet), just a few hundred metres from the shore.
There were fears on Thursday night that the final toll could rise further to 300 or more people since rescuers said that only around 150 survivors had been plucked from the water over 12 hours after the disaster.
"We are doing our utmost effort to rescue from the sea as many lives as possible. Today more than 150 people have been saved, otherwise they would have drowned," Admiral Felicio Angrisano said in the statement on Thursday afternoon.
"Every day, thousands of men and women desperately try to escape war-torn countries and misery, travelling on crumbling boats, which are old and overcrowded," he added.
"These boats are destined to sink. The rough sea and approach of winter increases the risk."
Angrisano said that the already dire situation is likely to get worse, a situation which "cannot fail to mark the conscience of everyone".
"For the many victims of these days, also on behalf of all my men engaged in relief efforts, I express my deepest sympathy. "
Rescuers and local fishermen were overcome with emotion as they spoke of chaotic early morning scenes in the water, with "a sea of heads" as desperate refugees waved their arms and screamed.
There were also poignant stories of survival like the young Eritrean woman thought dead and laid out with other corpses before medical personnel realised she was still breathing and revived her.
"Seeing the bodies of the children was a tragedy. We have run out of coffins," said Pietro Bartolo, a doctor. "In many years of work here, I have never seen anything like this," he said.
Lampedusa is one of the main entry points into the European Union for asylum-seekers crossing from north Africa or the eastern Mediterranean.
Migreurop, a network of immigration charities, estimates some 17,000 migrants have died at sea trying to reach Europe in the past 20 years, crossing on rickety fishing boats or dinghies.
Survivors said they were from Eritrea and Somalia and had left from the Libyan port of Misrata.
The migrants told rescuers they set fire to a blanket on the boat to attract the attention of coast guards after their vessel began taking on water and passing fishing boats ignored them.
The fire spread quickly, sowing panic on board which caused the boat to flip over and sink, as people jumped into the sea to save themselves.
Raffaele Colapinto, a local fisherman who was one the first on the scene, said: "We saw a sea of heads. We took as many as we could on board."
Visibly shaken survivors in thermal blankets -- many of them bare-chested -- were seen on the dock and being treated at the hospital where personnel said many had swallowed gasoline and sea water.
'A European tragedy'
The bodies were being taken to a hangar at the local airport because there was no more room in the morgue on the remote island, which has a population of around 6,000 people.
Italian Prime Minister Enrico Letta called the incident "an immense tragedy" and the government declared a national day of mourning on Friday and a minute of silence to be held in all schools.
Deputy Prime Minister Angelino Alfano called for more assistance from the European Union to deal with the sharp increase in refugee arrivals, calling it "a European tragedy".
Some 25,000 people have landed on Italian shores so far this year -- more than three times the number for the whole of 2012, although the figure for 2011 at the height of the Arab Spring revolts in north Africa was higher at around 50,000.
In the last major disaster in June 2011, between 200 and 270 immigrants fleeing Libya are believed to have died off the coast of Tunisia.
Many of the arrivals have been on Lampedusa, which is closer to Tunisia than to Sicily. Most of them have been Eritreans, Somalis and Syrians.
"We no longer have any space for the living or the dead," local mayor Giusi Nicolini said, explaining the cemetery and the refugee centre were full.
Letta "should come here and count the bodies", said the mayor, who often accuses the national government of failing to help the island.
The EU's Home Affairs Commissioner Cecilia Malmstroem called on EU countries to do more to take in refugees, which she said would help reduce the
number of perilous Mediterranean crossings.
Pope Francis, who visited Lampedusa in July to plead for more attention to the plight of refugees, called the disaster "shameful" and called for action
to prevent more deaths.