But the police offered no theory about how the vessels ran into each other on a clear night in one of the safest and most regulated waterways in Asia. The crash was Hong Kong's deadliest accident in more than 15 years, and the worst maritime accident in more than 40.

Police commissioner Tsang Wai-hung said crew from both boats were detained on suspicion of endangering passengers by operating the craft unsafely.

"We expect further persons to be arrested."

Tsang said police suspected that both crews had not "exercised the care required of them by law", but he did not elaborate.

A ferry collided with the Lamma IV, which was taking more than 100 employees of Power Assets Holdings and their families to famed Victoria Harbour to watch a fireworks display in celebration of China's National Day and mid-autumn festival.

The government said 101 people were sent to hospitals; 66 were discharged and four had serious injuries or were in a critical condition.

The ferry was damaged but completed its journey, and some of its passengers were treated for injuries.

Local television later showed images of the ferry with its bow chewed up and chunks of it missing.

The government said 28 bodies were recovered overnight, and eight more victims were declared dead at hospitals.

Two bodies found aboard the vessel yesterday raised the death toll to 38, according to government statements. Four of those killed were children.

Salvage crews raised the half-submerged Lamma IV using three crane barges yesterday.

Several dozen relatives of victims travelled by boat to take part in a traditional Chinese mourning ritual, praying alongside Taoist priests and tossing spirit money into the wind.

Survivors told local television stations that the power company boat started sinking rapidly after the 8.23pm collision.

One woman said she swallowed a lot of water as she swam back to shore.

A man said he had been on board with his children and did not know where they were.

Though there was no immediate word about how the collision occurred in Hong Kong's tightly regulated waterways, it appeared human error was involved. Both vessels should have been illuminated by running lights when they crashed.

Power Assets' operations director, Yuen Sui-see, said the Lamma IV was carrying 121 passengers and three crew members, well below its capacity of more than 200.

"There was a boat that came in close and crashed," he said.

"After the crash, the other boat . didn't stop."

The ferry involved, the Sea Smooth, has a top speed of almost 45km/h and carries as many as 200 passengers.

Local news reports said it was operated by the Hong Kong and Kowloon Ferry company on a regularly scheduled service.

Hong Kong fire services deployed seven boats, including one to support diving operations, and more than 200 rescue personnel, the government said.

Four rescue boats and a team of divers were dispatched from the nearby mainland Chinese province of Guangdong.