Residents flocked to the tanker with jerry cans to collect fuel after it overturned
Residents had flocked to the tanker with jerry cans, buckets and other containers to collect leaking fuel from it after it overturned.
It was travelling from the southern port city of Karachi to Lahore when the driver lost control and it crashed near the city of Bahawalpur.
Some reports suggested the tanker had suffered a burst tyre.
Police had tried to seal off the area but became overwhelmed by the scores of people trying to reach the vehicle.
Dr Rizwan Naseer, rescue services chief for the Punjab, the country's second largest province, said many of the victims were beyond recognition and that the death toll was likely to rise.
"At least 123 people have been killed and more than 100 wounded in a fire which erupted after an oil tanker turned over and victims rushed to collect spilt fuel," senior local government official Rana Mohammad Saleem Afzal told state television."
He said residents were told about the leaking oil tanker over a loudspeaker at a local mosque.
"After about 10 minutes the tanker exploded in a huge fireball and enveloped the people collecting petrol. It was not clear how the fire started," said regional police chief Raja Riffat.
"According to the initial reports, somebody tried to light a cigarette. The spilt fuel caught fire, leading to the tanker's explosion," Jam Sajjad Hussain, spokesman for the rescue services, added.
Those seriously injured in the explosion were airlifted to nearby hospitals by army helicopters.
The tragedy happened on the eve of Eid ul-Fitr celebrations marking the end of the holy fasting month of Ramadan in Pakistan.
Prime Minister Nawaz Sharif expressed his grief and ordered provincial leaders to ensure victims received "full medical assistance".