Police said the car crashed into the beer garden of the Royal Hotel on Vincent Street at 6.05pm .
Emergency crews and air ambulances have rushed to the scene in the tourist town, 90 minutes north-west of Melbourne.
Dozens of volunteers from the CFS and SES are also there.
The street has been sealed off with police tape.
An emotional Kimmi Moscicki said she was at the RSL nearby when she heard a noise.
“We all turned around and we saw a car rocket-launch and a lot of bodies flying through the air,” she said.
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“Nearly everyone that was out tonight was helping as much as they could.
“Unfortunately there’s a lot of people that have been killed.
“We don’t know why it’s happened.
”Basically it looks like it’s a bomb’s gone off.”
Police are looking for witnesses and anybody with video footage.
Victoria Police have told people to avoid the area.