The overcrowded boat was carrying about 500 migrants when it suddenly listed, sending about 200 people into the water, a spokesman said.
It triggered a frantic operation to search for survivors.
The central Mediterranean route for illegal migration to Europe is currently the busiest.
More than 50,000 migrants have reached Italy this year.
The route is also the most deadly, accounting for the vast majority of the 1,364 people who the UN estimates have drowned in the Mediterranean this year.
African migrants sold in Libya 'slave markets', IOM says.
One report suggested a private humanitarian group, Moas, had begun lifting people from the crowded wooden boat about 30 nautical miles off Libya, when many fell into the water.
It is thought they may have been knocked off balance by a wave.
Chris Catrambone of Moas tweeted pictures from the scene and said bodies were still in the water - including those of toddlers.
The Italian coastguard directed other boats to the scene - including Italian, British and Spanish navy vessels - while a helicopter and military aircraft dropped lifeboats, said AFP.
Meanwhile, the Italian coastguard said operations in the area had rescued a total of 1,800 people from 10 separate vessels on Wednesday.
Leaders of the world's wealthiest nations, the G7, are meeting on the Italian island of Sicily on Friday and the deputy executive director of the UN's children's organisation Unicef urged them to address the continuing tragedy in the seas around them.
"The tragedy of children dying in the Mediterranean is a wake-up call to leaders meeting in Sicily," said Justin Forsyth.
"These extremely vulnerable children need action now."