Police said the car crashed into the beer garden of the Royal Hotel on Vincent Street at 6.05pm.
The initial death toll was three but police confirmd just before midnight that the number had grown to five.
Emergency crews and air ambulances rushed to the scene in the tourist town, 90 minutes north-west of Melbourne.
Ambulance Victoria said four people were flown to hospitals and three others taken by road.
The flown patients include two taken to the Royal Melbourne Hospital, one to the Alfred, and one to the Royal Children's Hospital. Those taken by road include two to Ballarat Base Hospital and one to the Royal Melbourne Hospital.
The street around the pub was sealed off with police tape as dozens of volunteers and emergency services personnel at the scene.
A car was also seen taped off by police.
Abandoned drinks could be seen on picnic tables set on a grass area.
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.
"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."
Local MP Catherine King said her "thoughts were with those at the scene, their friends and families and the broader Daylesford community".
Police are looking for witnesses and anybody with video footage.
Victoria Police have told people to avoid the area.
https://news.google.com/rss/articles/CBMic2h0dHBzOi8vd3d3LjluZXdzLmNvbS5hdS9uYXRpb25hbC9kYXlsZXNmb3JkLXB1Yi1jcmFzaC12aWN0b3JpYS12aW5jZW50LXN0cmVldC9jZjU3NWQxOC04NTk2LTQxMzQtYTk5Zi0xZjcyNjUyZjYxMzHSAQA?oc=5
2023-11-05 11:56:14Z
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