Ms Gillard says between 123 and 133 people were believed to be on board the boat when it got into distress 107 nautical miles north of Christmas Island.
"As we speak, my best advice is 123 people have been rescued," she told federal parliament on Wednesday.
Earlier reports said a boat carrying around 150 suspected asylum seekers had capsized.
A maritime rescue was under way with two merchant ships on site, said Australian authorities. Last week, a boat carrying around 200 suspected asylum seekers capsized in the same area, killing around 90 lives.
"The vessel has capsized, there are people in the water," Australian Maritime Safety Authority (AMSA) spokeswoman Jo Meehan told Australian television.
"There are survivors and they will be recovering survivors. Reports are the conditions are fair, not ideal."
A photograph of the boat before it capsized, released by AMSA, showed a heavily crowded boat, which looks like it is made of timber. The photo showed calm seas in the area, about 200 kms north of Christmas Island and 185 kms south of Indonesia.
The latest incidents have reignited a heated political debate over refugee policy and border security in Australia, despite the fact the country only receives a few thousand asylum-seekers by boat each year.
The government has agreement with Malaysia to process asylum seekers, but the opposition refuses to support the plan in Australia's parliament, preferring to re-open an offshore detention centre on the remote Pacific Island of Nauru.
The waters between Indonesia and Christmas Island are a popular route for asylum seekers, who transit through Indonesia with the help of people smugglers in often overcrowded boats.
So far this year, more than 50 boats carrying more than 4,000 asylum seekers have been detected by Australian authorities.
The trip is often dangerous. In December 2011, as many as 200 died when an overcrowded boat sank off the coast of East Java. In 2010, 50 asylum seekers died when their boat was thrown onto rocks at Christmas Island.
In 2001, a crowded boat known as the SIEV X sank on its way to Australia with the loss of 350 lives.
