Search and rescue headquarters in Wellington said the 360 passengers and 340 crew aboard the 20,000-tonne Mikhail Lermontov were all apparently safe, though reports late last night spoke of confusion at the scene.
The liner, which left Sydney on February 7 for a scheduled cruise of New Zealand and the Pacific Islands, sank in Port Gore about 10.30pm after hitting rocks at Cape Jackson, at the northern tip of the Marlborough Sounds about four hours earlier. It had been bound for Fiordland.
Officials said the ship smashed on to the rocks after both its engines failed.
The helpless ship then drifted into the sheltered Port Gore, where the captain ordered all 700 passengers and crew to take to the lifeboats. They were then picked up by an armada of small craft answering the ship's distress signals.
Everyone was safely evacuated from the boat before it sank in about 33 metres of water.
Most of the passengers and crew were later transferred to the inter-island ferry Arahura, which headed for Wellington. The ferry was expected to reach Wellington early this morning.
Hotels in the capital have been alerted to be on standby to receive the passengers, most of whom are Australians or New Zealanders.
A spokesman for Wellington emergency services said about a dozen ambulances could be mobilised immediately to take passengers once they arrive in the city.
After receiving the ship's distress call, authorities directed all craft in the area to go to the Lermontov's aid.
About 100 passengers were put aboard a bulk lpg gas carrier, the Tarihiko. Others were picked up by police launches, Navy patrol boats and local fishing boats and pleasure craft before later being transferred to the Arahura.
There was no panic and the evacuation was carried out smoothly and quickly.
Port Gore householder Tom Smith saw the crippled liner making its way along the coast about 6km from his home.
"We saw the boat come in with a list on, to the port side," Mr Smith said. "There were about 20-knot winds."
It was the first major passenger shipping accident in New Zealand since 1968 when the Wahine struck rocks in a storm at the entrance to Wellington harbour and 51 people died.
The ship was built in East Germany, in 1972, and has been strengthened for pack ice. Registered in Leningrad, the vessel cruises the Pacific during the summer.
February 18: A 34-year-old engineer was last night believed to be the only fatality of the doomed Russian cruise ship, the Mikhall Lermontov, as an urgent inquiry got underway into how the tragedy happened.
The Prime Minister, the Rt Hon. D. R. Lange, expressed "disquiet" about the sinking and said he expected to have a preliminary report by Friday.
He said the question which the inquiry would have to address itself to was: "Ought a vessel to hit a rock which most people should know about?
"Answer - it shouldn't," he added.
The rescue services last night scaled down their operation saying they were now satisfied that the Russian engineer was the only serious casualty of an amazing rescue in which 738 people were safely evacuated from the Lermontov before it sank in Port Gore.