Thirteen people were pulled out of the snow in critical condition and another 35 were still missing. Rescue operations were being hampered by heavy snowfall, with helicopters unable to fly in or out, an army spokesman said.
The seven confirmed dead were taken alive from the snow, but could not be flown to hospital. They died from their injuries.
The avalanche thundered through the heart of the resort at about 3pm GMT, demolishing four houses as well as the fire brigade depot from whichrescues are usually staged, Austrian TV said.
It struck as stranded holidaymakers, including several Britons, attended a party laid on by the village to relieve their frustration at being trapped and unable to ski. The resort has been cut off since last Wednesday. Despite avalanche warnings, they believed they were secure in the confines of the village.
Last night helicopters and hospitals were on stand-by in the nearby larger town of Landeck.
A British businessman holidaying in the resort, Chris Laming from Kent, reported that five bodies had been recovered from the snow, which "obliterated" a hotel full of tourists on the edge of the village, along with several chalets.
Avalanches - the result of the worst Alpine weather in half a century - have already killed more than 20 people in the region this year. Six Britons have been among those who have died.
As snow storms, heavy rain and high winds last night swept the mountains of five Alpine countries - France, Germany, Austria, Switzerland and Italy - rescue operations by the armed forces were thwarted.
Mr Laming, on holiday with his wife and two children, said that a Dutch special constable staying in his hotel had recovered five bodies.
"The avalanche didn't hit us directly but it was the weirdest thing I've ever experienced," he said. "We had all been taking part in a makeshift skiing competition, organised by the tourist office, in the centre of the village." He had lightheartedly described the activities to The Independent earlier in the day.
He said last night: "They are evacuating people from the edge of town and putting them up in the hotel. There are blankets at reception."
Conditions were worsening and a gale-force wind was blowing, Mr Laming said.
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