The 7.3-magnitude quake struck at a depth of 57 kilometres (35 miles), some 30 kilometres off the coast of Efate, Vanuatu's main island, at 12:47 pm (0147 GMT), according to the US Geological Survey.
A 5.5-magnitude aftershock struck minutes after the main quake, followed by a series of lesser tremors over the following hours.
The ground floor of a four-storey block in Port Vila used by the US, French and other embassies was completely flattened, AFP photos showed.
"There's people in the buildings in town. There were bodies there when we walked past," resident Michael Thompson told AFP by satellite phone after posting images of the destruction on social media.
A landslide on one road had covered a bus, he said, "so there's obviously some deaths there".
As well as destroying the ground floor of the diplomatic building, the quake also knocked down at least two bridges and toppled other buildings, Thompson said.
'Completely flat'
The bottom floor of the embassy block "no longer exists," he said.
"It is just completely flat. The top three floors are still holding but they have dropped."
"If there was anyone in there at the time, then they're gone," said Thompson, who runs a zipline adventure business in Vanuatu.
Thompson said the ground floor was used by the US embassy. This could not be immediately confirmed.
The United States closed the mission until further notice because of "considerable damage", the US embassy in Papua New Guinea said in a message on social media.
"Our thoughts are with everyone affected by this earthquake," the embassy said.
New Zealand's High Commission, which is in the same building as the US, French, British and Australian missions, also suffered "significant damage", the government said.
Earthquakes are common in Vanuatu, a low-lying archipelago of 320,000 people that straddles the seismic Ring of Fire, an arc of intense tectonic activity that stretches through Southeast Asia and across the Pacific basin.
The quake cut off most mobile networks on the Pacific island, Thompson said.
"They're just cracking on with a rescue operation. The support we need from overseas is medical evacuation and skilled rescue, kind of people that can operate in earthquakes," he said.
The streets of the city were strewn with broken glass and other debris from damaged buildings, his footage showed.
Broken glass, debris
Video posted by Thompson and verified by AFP showed uniformed rescuers working on a building that had completely collapsed, crushing parked cars and trucks below.
The streets of the city were strewn with broken glass and other debris from cracked buildings.
Nibhay Nand, a Sydney-based pharmacist with businesses across the South Pacific, said he had spoken to staff in Port Vila who said most of the store there had been "destroyed" and that other buildings nearby had "collapsed".
"We are waiting for everyone to get online to know how devastating and traumatic this will be," Nand told AFP.
A tsunami warning was issued after the quake, with waves of up to one metre (three feet) forecast for some areas of Vanuatu, but it was soon lifted by the Pacific Tsunami Warning Center.
Australia stands ready to help, said Foreign Minister Penny Wong.
"Vanuatu is family and we will always be there in times of need," she said in a statement.
Vanuatu is ranked as one of the countries most susceptible to natural disasters such as earthquakes, storm damage, flooding and tsunamis, according to the annual World Risk Report.
Residents should now be alert for further aftershocks, which can be nearly as dangerous as the original event, said University of Technology Sydney civil and earthquake engineer Behzad Fatahi.
"It is expected that this very strong ground motion near Port Vila has caused cracks in masonry walls, foundation instability, and tilting of vulnerable structures," he said.
