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The crowded tram was travelling in the centre of Milan at rush hour when it appeared to crash into the side of a building.
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The crowded tram was travelling on the line 9 route along Milan's Viale Vittorio Veneto at about 16:00 local time (15:00 GMT) when it left the track and crashed into a building.
One of the people who died, a 60-year-old man, is thought to have been a pedestrian hit by the tram, while the other fatality and most of the injured were passengers.
Numerous ambulances went to the scene as reports emerged of people trapped in the wreckage.
Passengers described hearing a noise underneath the tram, after which it veered off its track, gathered speed and went into the side of a building.
"I thought it was an earthquake. I was sitting down and I fell on the floor, along with the other passengers," one man told Ansa news agency. "It was terrible."
As it left the track, the tram apparently first hit a traffic light before smashing the window of a restaurant. A delivery rider waiting at the traffic light and a young man on a pavement narrowly escaped injury, La Repubblica website reported.
"I got on at the first stop, [Piazza della] Repubblica," one female passenger told Corriere della Sera. "I was standing next to the driver, and they all crashed into me."
"I just heard an enormous bang," said 27-year-old Anna, who was in an office nearby, quoted by AFP. "I saw a bit of the tram had gone into a shop."
Civil protection teams set up a tent at the scene to help the injured.
It is not clear what caused the derailment, although media reports suggested the tram had taken a sharp corner too quickly, as it turned out of Viale Vittorio Veneto.
Italian Prime Minister Giorgia Meloni expressed her "deepest condolences" over the deaths.
Milan Mayor Giuseppe Sala and other city officials visited the scene of the crash.
Sala said the incident was a "tragedy" and that there would be investigations. The driver was "very experienced", he said, adding that he had only been on d
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