The incident took place halfway between the Italian and Albanian coasts at 0300GMT on Thursday.
The dead included a mother and her two small children.
Several refugees are still missing, according to Italian sources, and the search is continuing.
Eight people were injured, with two taken to hospital at Otranto, Italy, for treatment for head wounds.
Thrown overboard
The inflatable, which had a powerful engine, left the Albanian seaport of Vlera on Wednesday night heading for the Italian coast.
The two boats collided when the dinghy tried to cut across the patrol boat's bows to evade capture in the dark.
Most of the 34 refugees, believed to be Kosovar Albanians, were thrown overboard.
According to the customs police, whose patrol boat it was, the accident was caused by "a dangerous manoeuvre of the dinghy's navigator, who was trying to avoid being seen by the police".
Illegal route
The motorboat had been on patrol but had not been pursuing the inflatable, said the police.
Police have arrested three Albanians accused of trying to smuggle refugees into Italy.
There is a lucrative traffic in people smuggling across the Straits of Otranto between Albania and Italy, run by organised criminals, says BBC Correspondent David Willey.
Italian navy and coastguard vessels regularly patrol the Albanian coast in agreement with the Tirana authorities to try to stop illegal immigration into Italy and the EU.
Refugees from Kosovo are automatically granted temporary asylum in Italy, while those of other nationalities are repatriated where possible.
Country profiles
Analysis: The impact on Albania
(30 Mar 99 | Kosovo)
Italy prepares for refugee onslaught
(27 Mar 99 | Europe)
United Nations High Commissioner for Refugees
International Crisis Group
La Repubblica
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