The tanker, called the Kashmir, was built in 1988. It was carrying some 30,000 tons of oil condensates from Iran to the United Arab Emirates (UAE) port of Jebel Ali, oil industry sources said.

The second ship was a container vessel called Sima Buoy, which was leaving the port when the incident took place, ship brokers said.

The official WAM news agency said the two vessels collided at 12:35 around 13 km from Jebel Ali port.

It was not immediately clear what caused the incident but one witness said the oil tanker appeared to be badly damaged.

"I work for a sea plane company so when we saw the flames from the shore we went up to have a look," witness Matthias Seifert said.

"We saw two ships, one of them badly damaged. Both were on fire but the tanker looked like it was about to sink."

Dubai, part of the seven-member UAE federation, is a small oil producer, pumping less than 100,000 barrels per day. The UAE is the world's fifth-largest oil exporter with current output of around 2.26 million barrels per day.

Most of the UAE's oil is located in the capital Abu Dhabi and oil industry sources said the fire did not involve any of Dubai's offshore oil platforms.