Authorities would not identify the victims or disclose their nationalities but said some foreigners were among the dead.
"It's a tragic day for our city ... Lisbon is in mourning, it is a tragic, tragic incident," Carlos Moedas, mayor of the Portuguese capital, told reporters.
Footage from the site showed the yellow tram-like funicular, which carries people up and down a steep hillside in the Portuguese capital, destroyed, and emergency workers pulling people out of the wreckage.
The accident reportedly occurred at the start of the evening rush hour.
President Marcelo Rebelo de Sousa lamented the tragic accident in a statement, expressing hope that authorities would soon establish what had caused the crash.
Five of the injured were in serious condition and a child is among the injured, the National Institute for Medical Emergencies said in a statement.
The line, which opened in 1885, connects Lisbon's downtown area near the Restauradores Square with the Bairro Alto (Upper Quarter), famous for its vibrant nightlife.
It is one of three funicular lines operated by the municipal public transport company Carris and is used by tourists as well as local residents.
Its two cars are attached to opposite ends of a haulage cable with traction provided by electric motors on the two cars.
The car at the bottom of the line was apparently undamaged but user-generated video footage aired by CNN Portugal showed it jolting violently when the other one derailed and several passengers jumping out of its windows and people shouting.
Portugal, and Lisbon in particular, have experienced a tourism boom in the past decade, with visitors cramming the popular downtown area in the summer months.
with AP
