A powerful earthquake and tsunami struck the tiny Solomon Islands yesterday, swallowing entire villages and killing at least 12 people with many more missing.

The shallow quake, with a magnitude of at least eight, levelled buildings and damaged a hospital on Gizo island northwest of the Solomons capital, Honiara. A tsunami that witnesses described as the height of a two-storey building sucked homes into the sea as thousands of panicked residents fled for higher ground.

At least seven people died in Gizo, many trapped in their homes when waves swept through the town. Other bodies could be seen but not reached because of huge waves crashing ashore, the government said in a statement.

"The wave was up to ten-metres high in some villages," Solomon Islands' chief government spokesman Alfred Maesulia said. "Some villages have been entirely washed away."

The quake struck 350 km northwest of Honiara during the morning and sparked a tsunami alert around the Pacific.

Beaches along Australia's east coast were closed and ferry services halted in Sydney Harbour amid fears of a repeat of the 2004 Indian Ocean earthquake and tsunami disaster. Roads in Australia's north were gridlocked as residents fled the coast.

The alert was lifted about nine hours later, with damage confined to the immediate area around the quake. Solomons Prime Minister Manasseh Sogavare said the disaster could have been worse if it had happened only a few hours earlier, in darkness, when more people would have been asleep.

"My heart goes out to all of you in this very trying time," he said in national radio address yesterday evening.

Government and Red Cross disaster teams are taking tents, food and water to the area, Sogavare said. Australia, which said the wave also hit the western Papua New Guinea island of Bougainville, has offered A$2 million ($1.6 million) in aid.

"The water just came up about probably about four to five metres above sea level and kind of just went up into the communities and doused everything," Danny Kennedy, a dive shop owner and provincial politician on Gizo, said.

A transport boat is grounded on a street outside a market in Gizo, the second-largest town in the Solomon Islands, after a powerful earthquake and tsunami struck yesterday, damaging houses, villages and buildings and leaving more than 2,000 homeless.