The plane was taking off from Barwon Heads airport near Geelong about 8am on Friday when it came off the runway.
The pilot made an emergency landing nearby in Connewarre, police said.
Paramedics treated 17 people at the scene, including the pilot, with seven taken to hospital.
A man in his 30s with upper body injuries was flown to The Alfred in Melbourne, while another three people were taken to a Geelong hospital with other serious injuries.
They are all in a stable condition, an Ambulance Victoria spokeswoman said.
Another three passengers were taken to hospital for further assessments.
Victorian MP for Frankston Paul Edbrooke was among those in hospital.
He said everything seemed fine on board until it felt like the engine just stopped mid-air.
"I saw the pilot, who I think saved all our lives. He was trying to work (out) the problem, there was no panic," Mr Edbrooke told reporters.
"He was just working the throttle trying to get the engine back online and ... then ... it was him or one of the other instructors who said brace, we're going in."
Mr Edbrooke used to work in emergency services and said he would have expected to be pulling bodies out of the wreck, but that did not happen.
"I've seen a lot of accidents in my career but I think this is as close to a miracle as I will ever see," he said.
Investigations remain ongoing, a police spokesman said.
Aerial shots of the crash scene show the plane branded with a Skydive Australia logo.
The company has been approached for comment.
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