German police say a bus fire that killed 20 people started when a passenger who was smoking in the bus toilet failed to extinguish his cigarette properly.

Police are investigating how the fire could have engulfed the vehicle so quickly, giving the elderly passengers only moments to escape.

In Germany's deadliest such incident in 16 years, the coach burst into flames at around 8:40 pm (local time) on Tuesday on a motorway just outside the northern city of Hanover, police said.

The driver quickly pulled over, but in the panic to escape the inferno rapidly engulfing the bus only around a third of the mostly elderly passengers managed to get out in time.

Police said 12 people were injured, several of whom were being treated for serious burns in a nearby hospital. The Bild newspaper said the death toll could well rise.

Police said that the fire was not the result of a crash with another vehicle.

When smoke began pouring out of the toilet door another passenger opened it and flames shot out, setting the entire interior of the Mercedes coach in flames in seconds.

Just how the fire managed to take hold so quickly was unclear.

The local Hannoversche Allgemeine newspaper cited some of the 150 or so rescue workers as saying the fire was the worst they had ever seen and that some of the bodies were so badly charred they could not be identified.

It also cited police as saying that only those sitting in aisle seats were able to escape and that the positions of many of the bodies indicated they were trying to get out when they were overcome by smoke.

Television channel N24 cited a witness as saying that several walking frames had been recovered from the burnt-out vehicle.

The bus, operated by a Hanover firm, was said to be returning home from a day trip to the picturesque small town of Haltern am See in the state of North Rhine-Westphalia.

"I am deeply shaken by the dreadful fate of the victims of the fire," Transport Minister Wolfgang Tiefensee said.

"My sympathies go out to their loved ones."

He added that there had to be a "close" examination into what caused the accident.

If initial reports were correct that only a few passengers were able to escape the bus it would have to be investigated whether safety guidelines were adhered to and whether regulations should be strengthened, he said.

- AFP