Nearly all the victims from the quake - measuring between 6.9 and 7.9 on the Richter scale - are from the Indian town of Bhuj, in the state of Gujarat, and the nearby city of Ahmedabad.
The earthquake was felt as far away as Bangladesh, Nepal and the town of Pondicherry in south-east India where people fled in panic from a Republic Day parade.
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Seismologists say further tremors are likely.
"The death figure in the earthquake could be 1,000 or more," Indian Home Minister Lal Krishna Advani told reporters in Gujarat after arriving to inspect the damage.
Communications disrupted
The seismological bureau in Delhi located the epicentre was about 20 kilometres (12 miles) north-east of Bhuj, close to the Pakistan border.
First reports said Gujarat's main city, Ahmedabad, had suffered the brunt with more than 200 dead.
But it has now emerged that there are even more dead in Bhuj.
A Red Cross official told BBC News Online that Bhuj contained many old buildings susceptible to earthquake damage.
Gujarat's Home Minister Haren Pandya said people had been alerted to evacuate old buildings or those which have developed cracks.
"Both the main city hospitals are full of patients and bodies," Ahmedabad's senior civil official, K Srinivas said.
"There have been some tragic incidents, like a school which collapsed, trapping at least 30 students," he said.
Doctor Vikram Parjhi at Ahmedabad's main hospital said he had received nearly 200 casualties: "Fifty of those were dead on arrival."
A rescue operation involving Indian army troops is underway.
There are also reports of heavy casualties in the Gujarat town of Surat.
The Indian Prime Minister Atal Behari Vajpayee has summoned an emergency cabinet meeting to discuss the disaster.
The quake occurred at about 0850 local time (0320 GMT).
First reports measured it at 6.9 on the Richter scale but later the U.S. Geological Survey measured it at 7.9.
Taking to the streets
In India's financial centre, Bombay, cracks appeared in walls, and plaster fell from ceilings as some residents took to the streets, fearful of buildings collapsing.
The quake hit the capital, Delhi, just before the massive annual military parade to celebrate Republic Day. where thousands of soldiers and police were on alert against any possible terrorist attack.
Millions of Hindu pilgrims attending the Kumbh Mela festival in India's eastern state of Uttar Pradesh felt the ground sway beneath them, but there was no panic.
A BBC correspondent in neighbouring Pakistan says it was the most powerful earthquake to strike there in decades.
Two children died in the city of Hyderabad when their home, still under construction, collapsed.
"I first thought it was a bomb blast but then something fell on my only daughter," the mother of four-year-old victim Zainab Somroo said.
Local authorities said that government buildings were constructed to withstand earthquakes but most private buildings were not.
In the Nepalese capital, Kathmandu, many people ran out of their homes as they felt the tremor, but there are no indications of casualties.
"At first I felt dizzy and thought I was not feeling well but when things began to shake a lot for sometime I realized it was an earthquake so I yelled at other family members to go out to safety," Ram Prasad Sharma told AFP.
The last major earthquake to hit the subcontinent, in 1999, killed about 100 people in the lower Himalaya region.