The Chinese Shen Neng 1 ran aground late Saturday on Douglas Shoals, a favorite pristine haunt for recreational fishing east of the Great Keppel Island tourist resort. The shoals - off the coast of Queensland state in the Great Barrier Reef Marine Park - are in a protected part of the reef where shipping is restricted by environmental law.
Authorities fear an oil spill will damage the world's largest coral reef, which is off northeast Australia and listed as a World Heritage site.
The ship hit the reef at full speed, nine miles outside the shipping lane, State Premier Anna Bligh said.
A police boat was standing by to remove the 23 crew if the ship broke apart and an evacuation was necessary, she said.
Patches of oil were seen near the stricken ship early Sunday, but Maritime Safety Queensland reported no major loss from the 950 metric tons of oil on board.
"We are now very worried we might see further oil discharged from this ship," Bligh told reporters.
Maritime Safety Queensland general manager Patrick Quirk said the vessel was badly damaged on its port side.
"At one stage last night, we thought the ship was close to breaking up," he told reporters. "We are still very concerned about the ship."
"It is in danger of actually breaking a number of its main structures and breaking into a number of parts," he added.
A salvage contract had been signed, but the operation would be difficult and assessing the damage to the ship could take a week, Quirk said.
Bligh said she feared the salvage operation could spill more oil, which could reach the mainland coast within two days.
Local emergency crews were on standby to clean any oil that reached mainland beaches, she said.
Aircraft on Sunday began spraying chemicals on the oil patches to disperse it, she said.
Federal Environment Minister Peter Garrett said authorities had been working through the night to determine what risks the ship posed to the environment.
"The government is very conscious of the importance of the Great Barrier Reef environment and ensuring that impacts on its ecology are effectively managed," Garrett said in a statement.
The 755-foot bulk carrier was carrying about 65,000 metric tons of coal to China and ran aground within hours of leaving the Queensland port of Gladstone.
Conservationists have expressed outrage that bulk carriers can travel through the reef without a marine pilot with local expertise.
"The state government is being blinded by royalties and their shortsightedness will go down in history as killing the reef," said Larissa Waters, spokeswoman for the Queensland Greens, an environmentally focused political party.
Bligh said the question of when ships should require a marine pilot on the reef was under review because of the increase in freight traffic that will flow from new gas and coal export contracts to China.
She said a separate inquiry would determine how the ship came to stray from its shipping lane.
Quirk said state authorities were seeking information about the effect the coal could have on the reef environment if the ship broke up before its cargo can be salvaged.