The tsunami was triggered by a 7.7-magnitude earthquake that hit the coast of Sumatra on Monday.
At least 343 people have lost their lives so far. But disaster management official Ade Edward said the toll would climb possibly by as much as 200.
"Of those missing people we think two-thirds of them are probably dead, either swept out to sea or buried in the sand," AFP quoted Edward as saying.
"When we flew over the area yesterday we saw many bodies. Heads and legs were sticking out of the sand, some of them were in the trees. If we add another 200 to the toll, it would be at least 543 dead," he added.
Hopes are fading for hundreds of people still listed as missing. The quake destroyed most buildings in the coastal village of Betu Monga.
In 2004, a tsunami was triggered following a 9.3-magnitude quake off Sumatra and led to the deaths of 168,000 people in Indonesia alone.
Indonesia is in a zone known as the Pacific "ring of fire," which is prone to quakes and volcanic activity.
Meanwhile, in the central Java Island, dozens of people have died after violent volcanic eruptions at Mount Merapi on Tuesday.
Indonesia has appealed for aid after the tsunami and the volcano killed scores of people and made thousands homeless.
The volcano has again spewed ash and deadly heat clouds. However, there have been no reports of damage so far.