It appeared to be the worst nightclub fire for more than a decade.
Witnesses said a flare or firework lit by band members may have started the fire.
Police major Cleberson Braida said the 245 bodies were brought for identification to a gymnasium in the city of Santa Maria, at the southern tip of Brazil near the borders with Argentina and Uruguay
Television images showed smoke pouring out of the Kiss nightclub as shirtless young male partygoers joined firefighters in wielding axes and sledgehammers, pounding at windows and walls to break through to those trapped inside. Teenagers sprinted from the scene in search of help – others carried injured and burned friends away in their arms.
"There was so much smoke and fire, it was complete panic and it took a long time for people to get out, there were so many dead," survivor Luana Santos Silva said.
Ms Silva added that firefighters and ambulances responded quickly after the fire broke out, but it spread too fast inside the packed club for them to help.
Michele Pereira, another survivor, said she was near the stage and the fire broke out after band members lit flares.
"The band that was onstage began to use flares and, suddenly, they stopped the show and pointed them upward. At that point the ceiling caught fire. It was really weak, but in a matter of seconds it spread," she said.
Civil Police and regional government spokesman Marcelo Arigoni said earlier that the total number of victims was still unclear and there may be hundreds injured.
Rodrigo Moura, a security guard at the club, said the venue was at its maximum capacity of between 1000 and 2000, and partygoers were pushing and shoving to escape.
Ezekiel Corte Real, 23, said he helped people to escape. "I just got out because I'm very strong," he said.
The fire led President Dilma Rousseff to cancel meetings she had scheduled at a summit of Latin American and European leaders in Chile's capital of Santiago, and head to Santa Maria. "It is a tragedy for all of us," she said. "I am not going to continue in the meeting (in Chile), for very clear reasons."
"Sad Sunday", tweeted Tarso Genro, the governor of the southern state of Rio Grande do Sul. He said all possible action was being taken and that he would be in the city later in the day.
Santa Maria is a major university city, with a population of about a quarter of a million.