Five adults and two children were killed instantly when a transit van and a sedan collided on the Borung Highway north of Donald, about 300 kilometres from Melbourne.
Police say all seven were killed as the wreckage exploded in a huge fireball.
Officers from the Victoria Police Major Collision Investigation Unit were are continuing to piece together what happened but warned it could be days before the identities of victims were properly known.
Meanwhile police are investigating whether a 66-year-old woman suffered a heart attack before losing control of her Nissan station wagon and fatally crashing into the back of a water truck in Boronia yesterday afternoon.
Both accidents have pushed Victoria's 2006 road toll to 241, compared with 258 over the corresponding period last year.
However a spate of accidents on Victorian roads has seen 27 deaths since school holidays began 10 days ago.