The incident took place near al-Mandara village in Manfalut district of Assiut province, 350 km south of Egyptian capital Cairo, officials said.
The train was heading to Aswan from Cairo and crashed into the bus at the junction between the road and the railway, they said.
The children aged between four and six were on their way to a religious institute where they studied.
Assiut Governor Yehya Keshk was quoted as saying by Egypt's Ahram Online that 50 people were killed and 18 injured, seven of them critically, in the accident.
The worker manning the railroad crossing, which had been left open, was apparently asleep when the bus tried to cross the tracks.
"He has been arrested of course," Keshk told the State TV.
According to Egypt's Ministry of Interior, mostly children were among the dead. The bus driver and his assistant were also killed in the incident.
President Mohamed Morsi ordered authorities "to offer all assistance to the families of the victims," the state-run MENA news agency said.
It said Prime Minister Hisham Qandil rushed to the village of Manfalout, accompanied by ministers of health and education to look into the cause of the collision.
In a swift move, Transport Minister Rashad al-Metini resigned, saying he "accepts responsibility" for the accident.
Egyptian Railway Authority head Mostafa Qenawi also quit and Morsi has accepted his resignation.
Distraught relatives blocked the road at the accident
site and were "collecting the remaining body parts," Osama Seddik, an eyewitness, told Egypt's Ahram Online.
Seddik also quoted the families in the village as claiming that the railway crossing guard was asleep when the bus carrying the children drove over the track.
Relatives of the children staged angry demonstrations in the aftermath of the tragedy.
Egypt's Prosecutor-General Abdel-Meguid Mahmoud has ordered an investigation.
Ahram Online quoted a statement from the country's railway authority as saying that the bus driver drove over the crossing even though the warning lights and sirens were on.
Acting Director of the railway authority Hussein Zakaria was quoted as saying that families of the school children gathered at the accident site were preventing railway workers from removing the wreckage from the track.
According to a report published in July last year by the Central Authority for Public Transport, road and rail accidents claimed over 7,000 lives in Egypt in 2010, a rise of 7.9 per cent over the previous year.
In the worst railway disaster in Egypt, a total of 363 people were killed in February 2002 when a train heading to southern Egypt caught fire.
Cairo: At least 50 people, mostly nursery school children, were killed and 18 others injured on Saturday when their bus was hit by a speeding train in central Egypt after a railway crossing guard apparently fell asleep, triggering angry demonstrations and resignations.
First Published: Saturday, November 17, 2012, 13:35