So far 2,300 patients have been admitted to a hospital in the affected Gorakhpur area of Uttar Pradesh state.
A doctor told the BBC that it was a "tragedy beyond imagination", with children dying every day.
Nearly 6,000 children have died of encephalitis in the hospital since the first case was detected in 1978.
Most of the deaths this year have happened since July, doctors say.
The disease occurs regularly during the monsoon in the Gorakhpur region bordering Nepal in the foothills of the Himalayas.
The low-lying areas are prone to floods, providing a breeding ground for mosquitoes which commonly transmit the virus.
'Tragedy'
Doctors say affected patients come from 10-12 districts in the region, and are mostly poor.
Until 2005, the majority of deaths were caused by Japanese encephalitis, caused by a mosquito-borne virus, doctors say.
“Start Quote
It is an unbelievable tragedy - children are dying every day”
End Quote Dr KP Kushwaha Pediatrician
But in the past six years, children have been dying of other forms of viral encephalitis, caused by a mosquito-borne virus, doctors say.
Both the diseases cause head aches and vomiting and can lead to comas, brain dysfunctions, seizures and inflammations of the heart and kidney.
Doctors say children between the age of six months to 15 years are worst affected and most of the victims are poor people from rural areas.
"It is unbelievable tragedy. There are five to 10 children dying every day," Dr KP Kushwaha, head of paediatrics at the BRD Medical College, the only hospital treating patients, told the BBC.
Most of the 370 beds in the paediatrics and medicine departments at the hospital are overflowing with more than one patient to a bed, he said.
A fifth of the children who survive have to live with neurological weaknesses, doctors say.
"Children are most affected because they have lower immunity and they end up consuming a lot of contaminated water at home," Dr Kushwaha said.
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