The US Geological Survey (USGS), which initially said the quake had a magnitude of 7.8 before downgrading it to 7.5, said it struck 136 kilometres (84 miles) off the coastal town Gorontalo at a depth of 21 kilometres.
US officials issued a tsunami warning for an area within 1,000 kilometers of the epicentre, but a similar warning from Indonesian authorities was withdrawn shortly after being issued.
The Indonesian state-run Antara news agency said thousands of people fled their homes and hotel rooms in Gorontalo, with a population of several hundred thousand, when the quake struck around 1:02 am (1702 GMT Sunday).
It said one person had been injured and several buildings had collapsed in Gorontalo. One official told AFP that residents of Tolitoli, around 250 kilometres away, had also reported collapsed buildings.
"In an earthquake like this I think it's likely there will be victims," Indonesian geological official Sutiono said. Police on Sulawesi were not immediately available for comment.
The Hawaii-based Pacific Tsunami Warning Center warned that "this earthquake has the potential to generate a destructive regional tsunami along coasts located within a thousand kilometers (620 miles) of the earthquake epicenter." It advised that authorities in the region "take immediate action to evacuate coastal areas."
"This earthquake is located outside the Pacific. No tsunami threat exists to coastlines in the Pacific," it added. The USGS reported two powerful aftershocks.
The Indonesian archipelago straddles several continental plates in an area known as the Pacific Ring of Fire where seismic and volcanic activity is recorded on an almost daily basis.
Indonesia was the nation worst hit by the earthquake-triggered tsunami in December 2004 that killed more than 200,000 people in 11 countries across Asia, including over 168,000 people in Indonesia's Aceh province.
Monday's quake comes less than a week after Indonesia launched a high-tech tsunami warning system in a bid to prevent a repeat of tragedies like that in 2004.
The 1.4 trillion rupiah (130.2 million dollar) system is able to detect an earthquake at sea and predict within five minutes whether it could cause a tsunami.
The system, built with German technology and funding from a number of foreign nations, will eventually include 23 or 24 buoys linked by cables to detectors on the ocean floor.
President Susilo Bambang Yudhoyono said at the launch Tuesday that Indonesia was "living on the edge."
"Three tectonic plates -- the Eurasian, Indo-Australian and Pacific -- meet here," Yudhoyono said. "This kind of disaster can strike at any time."