Hampshire Police said three other people who were travelling in a red Fiat Bravo - with the woman who died - were taken to hospital in a "serious condition".
The bus driver, a man in his 50s, was also believed to have been seriously injured, while 10 of his passengers and four who were in a silver Mini Cooper were taken to hospital as a precaution.
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Detectives were investigating the circumstances of the crash that happened at the junction with Betty Haunt Lane at lunchtime.
Emergency crews worked to rescue those still trapped with three air ambulances scrambled.
It was earlier reported 25 people were injured but police later confirmed it was 23 - with four patients airlifted to hospital.
Police confirmed the woman died at the scene today, but she has not yet been named.
St Mary's Hospital, Newport, has brought in extra members of staff to deal with the influx of patients being brought into accident and emergency.
PASSENGERS 'COVERED IN BLOOD'
The Southern Vectis bus was understood to be in service at the time of the crash with passengers on board.
Alisha Smith, 23, who was on board at the time, claimed: "We were driving down the road. A mini pulled out from a side road.
"The driver did his best to avoid it, but we hit and then bounced on to hit another car following in a different direction.
"The next thing I know, I was on the floor and got up to see if everyone was ok.
"A few hurt and covered in blood, but no one severely injured at the top."
Group commander for the fire and rescue service, Justin Harden, said: "My thoughts are with the deceased's family, on behalf of everybody here.
"It has been a significant incident, the like of which we have not seen for some time."
Cops are now asking drivers to avoid the area completely while they investigate the cause of the crash at around 1pm today.
Richard Tyldsley, Southern Vectis general manager, said: "We are aware of a serious collision today involving one of our route 7 buses.
"At this stage the full circumstances and details of any injuries are unclear and we are investigating."
A spokesperson for Hampshire Police said: "We can confirm we are investigating a serious road traffic collision on Forest Road in Newport, Isle of Wight, which has resulted in the death of a woman in her 60s.
"The deceased was travelling in a red Fiat Bravo. Three other people in the vehicle are in a serious condition and have been taken to hospital.
"The driver of the bus, a man in his 50s, is also said to have sustained a serious injury.
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"Ten passengers who were travelling on the bus have also been taken to hospital as a precaution. Four people travelling in a silver Mini Cooper, were also taken to hospital as a precaution."
The Isle of Wight NHS Trust added: "A Major Incident has been declared after a serious RTI. We are requesting that people do not attend the Emergency Department unless absolutely necessary.
"Please ring NHS 111 for advice and guidance if you have an urgent medical health concern but it’s not life threatening."
More to follow...
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