The Federal Aviation Administration said the fiery crash occurred at about 7:40 a.m. (8.40 a.m. ET) near Lockhart, a town about 30 miles (50 km) south of Austin, the Texas capital.
The Caldwell County Sheriff's Office said 16 people were believed to have been aboard the doomed craft and that no one survived. The Texas Department of Public Safety confirmed that 16 people were dead.
Emergency responders in Texas said the basket portion of the balloon, which carries the passenger and crew, caught fire. Aerial television footage from the aftermath of the accident showed remnants of the red, white and blue balloon, adorned with a large, yellow smiley face wearing sunglasses, lying flattened at the crash site.
The National Transportation Safety Board offered no details on what may have caused the accident, which occurred on a clear day. But a spokesman at the scene, Erik Grosof, said teams from that agency and the Federal Bureau of Investigation were being dispatched to determine how the crash unfolded.
FBI assistance is routine in cases of major accidents, Grosof said.
Margaret Wylie, an area resident, told reporters she believed that before the balloon crashed, it hit power transmission lines, which caused popping sounds like a gun going off.
"It went up like a big fireball," she told reporters.
Grosof said the balloon was believed to have been operated by Heart of Texas Hot Air Balloon Rides, a company that serves the Austin, Houston and San Antonio areas.
The sunglass-wearing smiley face and stars-and-stripes design of the fallen craft matched the pattern of a balloon featured in pictures posted on the company's Facebook page, which carried messages of condolences.
Skip Nichols, identified by the company as its chief pilot, was reported by Austin station KVUE-TV, citing close friends, to have been at the controls of the balloon when it crashed.
The crash of the balloon was the deadliest on record in the Western Hemisphere, said Jeff Chatterton, a spokesman for the Balloon Federation of North America.
"There are thousands of balloons that go up every year," he said. "This is unspeakably tragic but it is rather unique."
More than 150 commercial hot air balloon companies operate in North America, he said.
Lockhart, a town of about 13,000 people near state parks, is home to a variety of barbecue restaurants considered to be among the best in the state.
The accident occurred about three years after 19 people, mostly Asian and European tourists, were killed in a hot-air balloon crash in Luxor, Egypt.
A year earlier, a hot air balloon burst into flames and crashed in New Zealand, killing all 11 people on board.