Waukesha Police Chief Dan Thompson told reporters that one person was in custody and a vehicle had been recovered after the incident in the town of around 72,000 people, 20 miles (32 km) west of Milwaukee.
Police said the number of dead and injured could change.
Thompson said it was not clear whether the incident was terrorist in nature, but that there was no further danger and police had lifted an order urging people to shelter.
A video posted online showed a red sport utility vehicle driving at speed alongside and into the parade, appearing to run over more than a dozen people before crowds ran from sidewalks to offer assistance.
Thompson said an officer fired shots at the vehicle in an attempt to stop the carnage. Another video on social media appeared to show police firing on the vehicle as it crashed through street barriers. Police did not believe shots had been fired from the vehicle, Thompson added, contrary to earlier reports.
Nurse Jodi Singsime, 42, took shelter in a store with members of her family before going out to help the injured.
"I heard and saw the people being hit, but what you could do more than seeing is hearing, and just that sound was insane," she said.
She choked up as she described coming across a small boy in the road:
"I felt his neck for a pulse and he had one but his eyes were barely open and his face - all I can remember is his sweet little innocent face was purple. He wasn't really with us."
Belen Santamaria, her husband, and their three-year old daughter were planning to join the parade with their Catholic church. But Santamaria, a 39-year-old Mexican factory worker, woke up on Sunday with a backache, so the family watched the procession from the sidewalk instead.
"The SUV came by at full speed," she said. "Then I started to hear people screaming."
She hid in a restaurant with their daughter while her husband, 39-year-old delivery worker Jesus Ochoa, ran to try to help injured people. He said he heard through other members of their church that roughly 10 members of the congregation, mostly Latinos and both adults and children, were injured.
"I was going to be there, walking," Santamaria said. "The SUV would have hit us too."
Another woman told Milwaukee's Fox6 TV station that the SUV had hit a dance team of girls between 9 and 15 years old. Video on social media showed small groups surrounding injured girls with white pompoms scattered around.
One witness said the driver also hit a group of "Dancing Grannies" and at least one person flipped over the hood of the SUV, according to Milwaukee's WISN-TV, an ABC affiliate.
"Please keep the Grannies, all those injured, and all those who witnessed this horrible event in your thoughts and prayers," the Milwaukee Dancing Grannies said on their Facebook page.
Another witness estimated the SUV was going about 40 mph (64 kph) when it hit the parade, the TV station said.
"As we were walking back in between the buildings ... we saw an SUV cross over, just put the pedal to the metal and just zooming full speed along the parade route. And then we heard a loud bang, and just deafening cries and screams from people who are struck by the vehicle," Angelito Tenorio, an alderman in nearby West Allis, told the Milwaukee Journal Sentinel.
The local CBS affiliate later showed a picture on Twitter of what appeared to be the red SUV involved with its hood crumpled and front fender hanging off, parked in a driveway.
White House spokeswoman Jen Psaki said President Joe Biden had been briefed on the "tragic situation" and federal officials were in contact with local authorities to offer assistance.
"Our hearts are with the families and the entire community," she said in a post on Twitter on Monday.
Photos and videos of Waukesha circulating on Twitter showed police cars and ambulances crowding a street decked out with Christmas lights in the aftermath of the incident, which occurred shortly after 4:30 p.m. (2230 GMT). People bundled up against the cold huddled on sidewalks as dusk fell.
The Children's Wisconsin hospital said it had received 15 patients as of 8 p.m., with no reported fatalities at that time.
Schools will remain closed on Monday for grades 4K-12 and additional counselors will be available for students, the district superintendent of schools said.
In 2015, four people were killed and 46 injured in Stillwater, Oklahoma, when a woman drove into a crowd watching the homecoming parade for a football team.
Reporting by Eric Beech and Alexandra Ulmer; Additional reporting by Radhika Anilkumar, David Morgan and Phil Stewart; Writing by Lincoln Feast and Kevin Liffey; Editing by Noeleen Walder, Himani Sarkar, Peter Cooney, Richard Pullin and Philippa Fletcher
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