The boat had been moored 20m out from a harbour on the north side of Santa Cruz island, which lies about 20 miles off the Californian mainland in the Channel Islands National Park.
The cause of the fire is unknown. The Coast Guard said there appeared to be no indication that there had been an initial explosion.
With intense heat emanating from the boat and in foggy conditions the firefighters struggled to contain the blaze, which they reported to have flared up repeatedly as new fuel sources, possibly gas tanks, ignited.
The liveaboard burnt down to the waterline before sinking in 20m of water, with part of the bow still visible.
The 24m Santa Barbara-based vessel, one of three operated by charter company Truth Aquatics, was on the final day of a three-day cruise.
The trip, scheduled to coincide with the USA’s Labour Day holiday weekend, had been intended to visit San Miguel Island depending on conditions, with macro diving the main attraction, but instead appeared to have concentrated on dive-sites around the more sheltered Santa Cruz.
The liveaboard was launched in 1981 and appears to have been a popular vessel among Californian divers, with a sound safety record.
According to its specification there were rafts and life-jackets for 110 passengers aboard and a fixed CO2 engine-room fire-suppression system.