The ferry carried 53 passengers, 12 crew members and 22 vehicles, including 14 trucks, it said.
Two bodies have been recovered and 20 were rescued, many of them unconscious after drifting in choppy waters for hours, said Banyuwangi police chief Rama Samtama Putra.
Nine boats, including two tug boats and two inflatable boats have been searching for the missing people since Wednesday night, battling waves up to 2 metres (6.5 feet) high in the overnight darkness.
Ferry tragedies are common in Indonesia, an archipelago of more than 17,000 islands, where ferries are often used as transport and safety regulations can lapse. (AP) GRS GRS