Turkish police were Monday conducting a massive manhunt for a gunman who killed 39 people, mostly foreigners, in a rampage at an upmarket nightclub in Istanbul where revellers were celebrating New Year.

After the latest in a string of deadly attacks to hit the country, President Recep Tayyip Erdogan said the carnage sought to sow chaos, but vowed Turkey would never bow to the threat.

The shooting spree at the waterside Reina nightclub erupted when 2017 in Turkey was just 75 minutes old, as people were seeing out a year of unprecedented bloodshed that saw hundreds die in strikes blamed on jihadists and Kurdish militants and a failed coup.

The assailant shot dead a policeman and a civilian at the club entrance and then turned his gun on partygoers inside where up to 700 people were ringing in the New Year.

NTV broadcaster said the gunman fired between 120 and 180 rounds in the seven-minute attack, during which many revellers threw themselves into the freezing waters of the Bosphorus to escape death.

One witness spoke of the panic and carnage at the venue, considered one of Istanbul's most popular nightclubs.

"Just as we were settling down, by the door there was a lot of dust and smoke. Gunshots rang out," professional footballer Sefa Boydas told AFP.

"People were walking on top of people."

Italian tourist Maximilien said: "We came here to have a good time today but everything was suddenly transformed into chaos and a night of horror."

Television pictures showed party-goers dressed to the nines -- men in suits and women in cocktail dresses -- emerging from the exclusive club in a state of shock.

Candles and flowers piled up outside the club in tribute to the victims and its Facebook page has been changed to a black square of mourning.

"Our heart is bleeding," wrote the club's owner Mehmet Kocarslan.

Prime Minister Binali Yildirim said the gunman was still at large after slipping away unnoticed after the attack, denying earlier reports a Santa Claus costume had been used as a disguise.

The assailant "left the gun and went away from the scene of the incident," he told reporters in Istanbul. "It was an armed terrorist."

Interior Minister Suleyman Soylu said the gunman had arrived with a gun concealed under an overcoat but subsequently exited the venue wearing a different garment.

The Reina club is a magnet for wealthy foreigners and there were a number of Arabs among the dead and wounded, including Saudis, Jordanians, Iraqis and Tunisians.

France said a dual-national Tunisian-French woman had died along with her Tunisian husband, while India said it had lost two nationals.

A young Arab Israeli woman, 18-year-old Lian Nasser, was killed, according to Israel's foreign ministry.

Canada's Prime Minister Justin Trudeau confirmed that a Canadian woman was killed, while Tass news agency reported that a Russian woman was also among the dead.