Twenty-three people were injured, and one of them died during the night, the Sao Jose hospital said.
Eliane Chaves, a Brazilian who has lived in Lisbon for 20 years, said she walked past the funicular every day.
Manuel Leal, leader of the Fectrans union, told local TV that workers on the Gloria railway - one of the symbols of the city - had complained about problems with the funicular's haulage cable tension that made braking difficult, but it was too early to say if that was the cause of the crash.
The line's two cars, each capable of carrying around 40 people, are attached to opposite ends of a haulage cable with traction provided by electric motors on the cars that counterbalance each other.
The car at the bottom of the line jolted back a couple of metres (yards) and was apparently undamaged, but video from bystanders showed several passengers jumping out of its windows.
The Gloria line transports around 3 million people annually, according to the town hall.
Some local media reported that a German family-of-three was among the victims, including a three-year-old child who suffered minor injuries, while the father died and the mother was seriously hurt.
Portugal, and Lisbon in particular, has experienced a tourism boom in the past decade, with visitors cramming the popular downtown area in the summer months - REUTERS
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