All 70 passengers and crew members were transported to the shore safely by speedboats.
The 114.93-tonne ferry named ‘T. Sandee Maneethup 111’ had left the pier at Bandon Bay in Surat Thani province at 10pm on Thursday.
It was scheduled to reach Koh Tao, located some 110 km offshore in Surat Thani’s Koh Pha Ngan district, at 6am on Friday.
Local officials said the ferry was hit by waves of about 3 metres high, resulting in sea water entering its hull and damaging the water pumps. The vessel stalled in water at around 15 nautical miles (27.78 km) from Koh Tao and was slowly sinking.
After the crew alerted officials, rescue speedboats were dispatched to transport the crew and the mainly foreign tourist passengers to the Koh Tao shore. No injuries or missing persons were reported as of press time on Friday.
Officials said that the ship completely sank beneath the waves at around 10.30am on Friday.
Koh Tao is considered to be one of the top five diving sites in the world, as well as being one of the best-loved travel destinations in Southeast Asia. The 21-square-kilometre island houses some 12,000 residents, and is also popular among migrant workers and expats.