Hong Kong investigators on Wednesday examined the wreck of a boat that sank in a collision which killed 38 people, as the city sought answers to its worst maritime accident for decades.

The Lamma IV was towed to a beach to reveal a gaping hole in its left rear from Monday evening's collision with the Sea Smooth ferry. The gash flooded its stern within minutes, trapping passengers in the submerged cabin.

More than 120 passengers and crew were on the Hong Kong Electric company's Lamma IV to watch a huge National Day fireworks display in Victoria Harbour when the accident occurred just off Lamma, an island to the southwest of Hong Kong.

British Prime Minister David Cameron sent his condolences to the victims after the consulate in the former British colony confirmed that an unidentified Briton was among the dead.

Investigators pored over the pleasure boat Lamma IV as they tried to piece together how such an accident could have happened in one of the world's busiest ports, which prides itself on its state-of-the-art transport infrastructure.

"The investigation is expected to take around six months," a marine department spokeswoman said.

Investigators will examine the boat's structural soundness, why it partially sank so quickly, whether there was adequate safety equipment on board and whether the captain followed the rules of the sea, she said.

"I never thought such a tragedy would happen here and so many people would die," said survivor Ivan Lee, 47, a building contractor who was on the Lamma IV with his wife and two young children.

"In less than a minute, the boat started to list and the water was coming in...as I put the life jacket over my son's head, we were already under water.

"I thought my whole family would die there," he told AFP.

Lee managed to escape out of a window with his son and daughter. His wife also survived. Distraught relatives of the dead were seen filing through the southern Chinese city's morgue to identify their loved ones. Many cried and comforted each other as they left.

US Consul General Stephen Young released a statement expressing his "deepest condolences" for the loss of life.

Police arrested the captains of both vessels on Tuesday along with five crew. All were released on bail and none has spoken publicly about what happened.

Police chief Tsang Wai-hung said the suspects "did not exercise the care required of them by law to ensure the safety of the vessels they were operating and the people on board", pointing to human error as the likely cause.

Hong Kong Chief Executive Leung Chun-ying announced three days of public mourning starting Thursday, when funeral services for the victims are expected to begin.

He also called for an independent inquiry, as the accident raised questions about whether the regional banking hub's maritime transport infrastructure had kept up with the huge growth in demand from mainland visitors.

Prakash Metaparti, an assistant professor in Logistics and Maritime Studies at Hong Kong Polytechnic University, said the deadliest maritime accident in the territory since 1971 was probably a case of human error.

"They should be able to navigate even in zero visibility with the radar. It's surprising that they didn't see each other...they should have seen each other," he told AFP. "Most likely they misunderstood each other's intentions."

Passengers on both vessels described scenes of panic and chaos as scores of people were thrown into the water from the Lamma IV. On the Sea Smooth, passengers said crew appeared to have no idea how to respond to the emergency.

At least five children were killed in the collision, officials said. Scores were injured, including some who remain in critical condition in hospital.

Ferry operator Hong Kong and Kowloon Ferry Holdings, in its first comments on the collision, said its captain was a 20-year veteran.

General manager Nelson Ng, who lost two relatives aboard the Lamma IV, rejected allegations from Hong Kong Electric executives that the ferry abandoned the sinking pleasure craft.

"We stopped at the scene and did not leave immediately, but what actually happened is up to the investigation to determine," he said.

"We cannot help but be shocked and angry. Disasters on such a scale are what we expect in places less developed than ours," the South China Morning Post said in an editorial.