By Erik de Castro

Manila - A passenger plane, trailing smoke from its left engine, plunged into Manila Bay and broke in two shortly after taking off from the Philippine capital on Monday, killing 18 of 34 people aboard.

Sixteen people, including two Australians, were rescued.

More than eight hours after the Fokker plane crashed into murky waters about 11m deep, only 14 bodies - some still strapped in their seats - had been recovered by rescue teams, which included Navy frogmen and fishermen.

Coastguard chief Vice-Admiral Ruben Lista said rescuers had shifted from a search and rescue phase to "search and retrieval operations", suggesting all hope of finding four others still missing had been abandoned.

The four are feared to have been trapped inside the plane, which was immediately filled with water as it sank into the muddy bottom of the bay, said officials.

Amateur video footage showed a trail of smoke from the left engine on the high-winged Fokker 27 plane just before it crashed into the bay, after taking off from Manila for the gambling centre of Laoag, 400km north of the capital.

The plane crashed about 1km from shore three minutes after take-off from Manila on a one-hour flight to Laoag, said the Air Transport Office.

A woman who had been walking along Manila Bay with her children told local radio she saw the plane crash.

"First I saw black smoke, then suddenly the tail portion split off and the rest of the plane sank into the bay. I saw one man waving a white piece of cloth. Later I could not see him any more," she said.

Four of the dead were children, including an 11-year-old boy whose body was found still bound to his seat.

The plane carried 29 passengers and five crew.

The survivors included the pilot and co-pilot. About half of them were in critical condition, some unconscious.

At least eight foreigners were among the passengers, including at least five Australians, said airline vice-president Alvin Yater.

Australian survivor Steve Thompson, 25, his arms and legs covered in bandages, said the pilot warned passengers to brace before the plane went down.

"The plane crashed, that's what happened. I really don't want to talk about it," he said.

A police tally showed another Australian, Bryan Forester, also survived.

"We understand that there were at least six Australians on board the aircraft, five from Sydney and one from Brisbane," said the Australian embassy in Manila in a statement.

The embassy only referred to one Australian survivor who had been identified so far and said he had been treated in hospital and released.

More than two dozen boats, including Navy craft, outrigger canoes belonging to fishermen and pleasure craft from the nearby Manila Yacht Club, converged on the crash site but the waters only yielded soaked luggage and metal fragments.

Divers pulled the dead body of a young boy from the sea and tenderly lifted him into the lap of a rescuer in an inflatable dinghy, who cradled the body as the boat moved away.

"My husband took three of the women (survivors) and we loaded them into our car," said Nerissa Abrico who was jogging along the bay when she witnessed the crash.

"I was cradling one of them because she was so weak...She said all she kept thinking about were the children on the plane."

Air Transport chief Adelberto Yap said the pilot reported engine trouble shortly after take-off.

"He radioed the tower that he was in distress and was going to ditch," said Yap, adding that there was no sign of sabotage.

Laoag is popular with tourists from China and Hong Kong. It has one of the largest casinos in the Philippines and has direct air links with Hong Kong.

This was the second crash of a Fokker aircraft within a week. Twenty of the 22 passengers and crew died at Luxembourg's international airport on November 6 when a twin-engine Fokker 50 smashed into a field in thick fog while coming in to land.

The last major plane crash in the Philippines occurred in April 2000 when an Air Philippine Boeing 737-200 crashed near the southern city of Davao killing all 131 people on board.