Officials said 137 people were on board the boat – mostly foreigners including Britons, Americans, Germans, South Africans, Indians and Egyptians – when it sank. Tourism sources said the vessel had a capacity of 100.
They had chartered the traditional boat known locally as a “Banoosh” for an evening dinner and cruise off the coast of the tiny Gulf island kingdom.
The boat’s owner, quoted by Al Arabiya television, said the boat may have been overcrowded and capsized when many passengers gathered on one side.
A survivor told Al Jazeera that the two-storey boat had capsized after apparently being struck by a wave as it was turning.
The boats owner said the captain initially refused to sail the overloaded boat but was forced by the hirers to leave the shore. The captain and two of his asistants survived.
Rescuers pulled 67 terrified survivors from the water.
Local television showed the upturned hull of the dhow, with empty orange life-jackets bobbing alongside.
Rescue workers had used pick-axes to try to break through the bottom of the vessel. A temporary morgue has been erected on the harbour side.
Earlier, Interior Minister Sheikh Rashid bin Abdullah al-Khalifa blamed the catastrophe on a technical failure.
“There must have been technical reasons that caused the accident. We met some of the survivors and they spoke about their surprise about the boat’s capsize,” he said on state television.
The accident happened at about 9.45 pm local time (5.15am AEDT) about a kilometre south of the Sheikh Khalifa bin Salman bridge, which links the capital Manama with the smaller Al-Muharraq island.
Ambulances rushed to the coastal guard base at Muharraq and speed boats have been combing the sea looking to rescue passengers.
Bodies wrapped in white sheets have been transported on stretchers off the rescue boats.
Bahrain’s Prime Minister Sheikh Khalifa bin Salman al-Khalifa was shown on state television comforting distraught survivors brought to the Muharraq base.
US Navy divers were sent to the scene to assist in the search and rescue of survivors and helicopters and small boats were being used to get to the site, a US navy spokesman said.
Bahrain is home to the US Navy’s Fifth Fleet. It is a “major non-NATO ally” of the United States and has a free trade agreement with Washington.
The monarchy is an archipelago of 35 islands ruled by the Sunni Muslim Al-Khalifa dynasty. It has 650,000 a population, of whom 450,000 are Bahrainis.
Bahrain, which has negligible oil reserves, is the leading banking centre in the Gulf and the main base of Islamic banking in the region.