The fleeing patrons were unable to find the emergency exits, local officials said.
Bodies were still being removed from the Kiss nightclub in the southern city of Santa Maria, Major Gerson da Rosa Ferreira, who was leading rescue efforts at the scene for the military police, said.
Officials said 180 people were confirmed dead, and Ferreira said the death toll would rise above 200. Local media is reporting the toll to be as high as 245 people. He said the victims died of asphyxiation or from being trampled, and that there were possibly as many as 500 people inside the club when the fire broke out at about 2:30am.
Television footage showed people sobbing outside the club, while shirtless firefighters used sledge hammers and axes to knock down an exterior wall to open up an exit.
"It was really fast. There was a lot of smoke, really dark smoke," survivor Aline Santos Silva, 29, told Globonews TV. "We were only able to get out quickly because we were in a VIP area close to the door."
Dilma Rousseff cut short a visit to Chile and was returning to Brazil following the blaze, her spokesperson said.
Luiza Sousa, a civil police official in Santa Maria, said the blaze started when a member of the band or its production team ignited a flare, which then set fire to the ceiling. The fire spread "in seconds," Sousa said.
The disaster recalls other incidents including a 2003 fire at a nightclub in West Warwick,
Rhode Island, that killed 100, and a Buenos Aires nightclub blaze in 2004 that killed nearly 200. In both incidents, a band or members of the audience ignited fires that set the establishment ablaze.
Brazil's safety standards and emergency response capabilities are under particular scrutiny as the country prepares to host the 2014 World Cup soccer tournament and the
2016 Summer Olympics.
Rio Grande do Sul state Health Secretary Ciro Simoni said emergency medical supplies from all over the state were being sent to the scene.
Santa Maria is some 186 miles (300 km) west of the state capital of
Porto Alegre. "A sad Sunday!" tweeted Rio Grande do Sul Governor
Tarso Genro. He said "all possible measures" were being taken in response and that he was on his way to the scene.