More than 280 people were rescued and rescue efforts were ongoing.
The KM Barcelona 5 was headed to Manado, the capital of North Sulawesi province, from Talaud, an island district in the province when it caught fire in waters near Talise, Vice Admiral Denih Hendrata said.
He said that three navy ships had been deployed and 284 passengers and crew members had been rescued.
The rescue operation included assistance from local fishermen, who saved some survivors wearing life jackets as they were drifting to nearby islands in the choppy waters.
Rescuers retrieved five bodies, including a pregnant woman.
There were no immediate reports of injuries and no exact figures of passengers and crew members onboard the ferry.
"We are still focusing on evacuation efforts," Hendrata said, adding that the cause of the fire was being investigated.
Photos and videos released by the National Search and Rescue Agency showed terrified passengers, mostly wearing life jackets, jumping into the sea.
Orange flames and black smoke billowed from the burning vessel.
Indonesia is an archipelago of more than 17,000 islands where ferries are a common method of travel.
Disasters occur regularly, with weak safety enforcement often blamed.
Residents of Mentawai Islands found several people stranded on July 14 after a speedboat carrying 18 people capsized during a storm the day before, authorities said.
All were in good condition.
A ferry sank near Indonesia's resort island of Bali early this month, leaving at least 19 dead and 16 others missing.
A two-week search operation involved more than 1000 rescuers, three navy ships, 15 boats, a helicopter and divers.
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