Inspectors believe the blaze began when a band's small pyrotechnics show ignited foam sound insulating material on the ceiling, releasing a putrid haze that caused scores of university students to choke to death.
Most victims died from smoke inhalation in what appeared to be the world's deadliest nightclub fire in more than a decade.
Survivors and the police inspector Marcelo Arigony said security guards briefly tried to block people from exiting.
Brazilian bars make patrons pay their entire tab at the end of the night before they are allowed to leave.
But Mr Arigony said the guards did not appear to block fleeing patrons for long.
"It was chaotic and it doesn't seem to have been done in bad faith because several security guards also died," he said.
Firefighters responding to the blaze had trouble getting inside the Kiss nightclub because "there was a barrier of bodies blocking the entrance", Guido Pedroso Melo, commander of the city's fire department said.
Authorities said band members who were on the stage when the fire broke out later talked with police and confirmed they used pyrotechnics during their show.
Police inspector Sandro Meinerz, said one band member died because he returned inside the burning building to save his accordion.
"It was terrible inside -- it was like one of those films of the Holocaust, bodies piled on top of one another," said Mr Meinerz. "We had to use trucks to remove them. It took about six hours to take the bodies away."
Television images from Santa Maria, a university city of about 260,000 people, showed black smoke billowing out of the club as shirtless young men who attended the party joined firefighters using axes and sledgehammers to pound the exterior walls, trying to reach those trapped inside.
Bodies of the dead and injured were strewn in the street and panicked screams filled the air as medics tried to help. There was little to be done; officials said most of those who died were suffocated by smoke within minutes.
Within hours a community gym was a horror scene, with body after body lined up on the floor, partially covered with black plastic as family members identified kin.
The party was organised by students from several academic departments from the Federal University of Santa Maria.
"There was so much smoke and fire, it was complete panic, and it took a long time for people to get out, there were so many dead," survivor Luana Santos Silva said.
Another survivor, Michele Pereira, said that she was near the stage when members of the band lit some sort of flare.
"The band that was on-stage began to use flares and, suddenly, they stopped the show and pointed them upward," she said.
"At that point, the ceiling caught fire. It was really weak, but in a matter of seconds it spread."