The fatal crash happened on the A66 near South Bank, Middlesbrough, in the early hours of this morning.
Cleveland Police said five people were travelling in the Passat when it was being driven the wrong way along the road.
The police vehicle, carrying two officers, was travelling in the correct direction when the two vehicles collided.
All seven people were pronounced dead at the scene.
The circumstances of the crash are now being investigated by the UK's Independent Office for Police Conduct (IOPC).
The watchdog said investigators had been sent to examine the evidence and establish what happened before the collision.
Cleveland Police Chief Constable Victoria Fuller urged people not to speculate while the investigation is under way.
"First and foremost, our thoughts are with the families of everyone involved in today's incident," she said.
She added: "No one should leave their home and not return safely, including police officers serving their communities and protecting the people of Cleveland."
Fourteen emergency service units were sent to the scene, including ambulance crews, a specialist paramedic, a hazardous area response team and a doctor from the Great North Air Ambulance Service.
The North East Ambulance Service said that, despite the efforts of those who attended, several people died at the scene.
A large section of the A66 has been closed while the investigation continues, with a substantial emergency response at the location.
A drone exclusion zone has also been introduced around the crash site.
The deaths of the two officers have prompted tributes from senior police figures and politicians, while the families of all seven victims are being supported.
