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Italian Prime Minister Matteo Renzi said officials were "not in a position to confirm or verify" that 700 people were on board the boat, which was on its way to Malta.
And he called for an emergency summit of leaders from across Europe to discuss how to prevent further deaths of migrants in the Mediterranean.
"We are working to ensure this meeting can be held by the end of the week. It has to be a priority," he said.
The capsizing comes amid a large number of migrants trying to leave Libya for Italian shores.
So far, at least 900 have died attempting the journey this year as boats capsized. This includes around 400 who were presumed drowned in a shipwreck last week.
The latest disaster could be the worst seen during the decades-long migrant crisis in the southern Mediterranean.
Carlotta Sami, from the United Nations High Commissioner for Refugees, said: "It seems we are looking at the worst massacre ever seen in the Mediterranean."
EU foreign policy chief Federica Mogherini said foreign ministers would discuss the issue at a scheduled meeting in Luxembourg on Monday.