Rescuers have retrieved four bodies from the water as well as several survivors, radio station DZMM reported from the scene, but the coastguard could not immediately confirm the fatalities.
"The wind suddenly picked up and the boat was forced to stop when the bow started taking in water. Passengers ran to the side just before it tipped over," student Donel Mendiola, one of the survivors, told the station by telephone.
"Some of us swam, but I saw some old people who were apparently already dead," Mendiola added.
The accident occurred off the town of Real, about 70 kilometres (43 miles) east of Manila, as the boat sailed towards the remote island of Polillo in rough weather, coastguard spokesman Armand Balilo told a news conference.
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The coastguard said the boat, "Mercraft 3", left the port of Real in the morning and capsized shortly before noon (before 0400 GMT).
"We have heard (there were) casualties, but we're still validating," Balilo said, adding that rescue helicopters and sea vessels were heading to the site.
"We believe the weather was a big factor" in the accident, he said, adding nearby boats had already rescued some of the 251 people on board.
Balilo said the ferry left Real as the southern section of the archipelago braced for Tropical Storm Tembin, forecast to hit land early Friday.
However, the vessel was allowed to sail as there were no storm warnings at or around Real or Polillo, east of the main island of Luzon, he said.
The boat was authorised to carry 286 people, he added.
The government has advised Filipinos planning to return to their home provinces for Christmas to do so earlier than usual to avoid heavy weather forecast to hit ahead of the holidays.
The Philippines, an archipelago of more than 7,000 islands on the Pacific typhoon belt, is plagued by poor sea transport, with badly regulated boats and ships providing the backbone for the system prone to overcrowding and accidents.
The latest accident occurred 30 years after another Philippine ferry, the Dona Paz, collided with an oil tanker in a pre-Christmas accident that claimed more than 4,000 lives in the world's worst peacetime maritime disaster.
More recently, the wooden ferry "Kim Nirvana" capsized shortly after departure off the city of Ormoc in the central Philippines in 2015, killing 61 people.
The accident was thought to have been due to overcrowding. As well as passengers, the boat had also been transporting sacks of cement, rice and fertiliser which would have weighed as much as 7.5 tonnes.
In 2013, at least 71 were killed when the Saint Thomas Aquinas ferry sank after colliding with a cargo ship near Cebu port in the central Philippines. The ship was carrying 830 passengers and crew.
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