The stricken tanker, called the Sanchi, which had been adrift and on fire following the accident with the freighter CF Crystal, had "suddenly ignited" around noon (0400 GMT), China Central Television (CCTV) said.
"Currently it has already sunk," CCTV said, citing the Shanghai maritime search and rescue centre. It showed video of a tower of billowing black smoke and flames on the surface of the water. The ship sank before 5 p.m. (0900 GMT), CCTV said.
China's State Oceanic Administration said that because the hull of the ship had detonated, a large amount of oil in surrounding waters was on fire, according to the official Xinhua news agency.
The Administration said it would expand the scope of its monitoring and "quickly ascertain the spread and drift of overflowing oil" from the wrecked ship.
A Chinese salvage team on Saturday recovered two bodies from the tanker. Another body, presumed to be one of the Sanchi's sailors, was found on Monday and brought to Shanghai for identification.
Chinese Foreign Minister Wang Yi had told his Iranian counterpart Mohammad Javad Zarif by telephone that "as long as there is 1 percent of hope, China will continue to make 100 percent effort" to rescue and recover other members of the crew.
The tanker, owned by National Iranian Tanker Co, was carrying almost 1 million barrels of condensate, an ultra-light crude oil, to South Korea.
It collided with the CF Crystal, which was carrying grain from the United States, about 160 nautical miles (184 km) off China's coast near Shanghai.