Hungary today declared a state of emergency in three western counties after a dam holding back a vast reservoir of toxic red sludge, from an alumina plant, burst, killing four people and injuring 120 others in what officials said was an "ecological catastrophe".

An elderly woman, a young man and a three-year-old child died in the deluge and six others were reported missing. Two of the injured were in a serious condition.

The sludge, which is waste produced during aluminium manufacture, swept cars off roads and damaged bridges and homes, forcing the evacuation of 400 residents. About 7,000 people are thought to have been directly affected by the spill.

The sludge poured out yesterday when a dam at the reservoir of the Ajkai Timfoldgyar Zrt alumina plant, owned by MAL Zrt, broke after days of heavy rain.

So far, about 1m cubic metres of sludge have leaked from the reservoir. Seven towns, including Kolontal, Devecser and Somlovasarhely, have been affected near the plant in Ajka, 100 miles south-west of Budapest.

Doctors said that the injured were being closely monitored because the chemical burns caused by the sludge could take days to emerge and what could seem like superficial injuries could later cause damage to deeper tissue.

Robert Kis, in Devecser, said his uncle was taken to Budapest by helicopter after the sludge "burned him to the bone". The flood overturned his wife's car, pushing it 30 metres to the back of the garden, while his van was lifted on to a fence.

The Hungarian prime minister, Viktor Orbán, said that the spill could have been caused by human error; there was no sign of it being due to natural causes. He also told a news conference there was no threat of radiation in the area affected by the flood of red mud.

The Hungarian government has suspended production at MAL Zrt and the company was ordered to repair the damaged reservoir after the environmental affairs state secretary, Zoltan Illes, called the spill an "ecological catastrophe".

There are fears that the sludge could reach the Raba and Danube rivers.

"We have declared a state of emergency in Veszprem, Gyor-Moson-Sopron and Vas counties," Anna Nagy, a government spokeswoman, told Reuters. "In Veszprem county it's because that is the scene of the disaster and the sludge is headed towards the other two counties."

Teams in protective clothing hosed down streets to disperse the slurry.

One resident told state television: "The ceiling is 3 metres high, and the sludge was 2.5 metres high. My child was at home; he managed to make a run for the roof. My father is 85. He tried to make me hold on to the window, but he had to be taken to hospital with severe leg injuries."

Several hundred tonnes of plaster were being poured into the Marcal river to bind the sludge and block its flow, the national disaster management directorate said.

People in Kolontar, the closest village to the burst reservoir, were trying to recover their belongings but police were not letting them enter their flooded homes.

"My bathtub is full of this sludge … when the dam burst it made a terrible noise. I had to run up the steps to the porch but the water was rising faster than I could run," Ferenc Steszli, 60, told Reuters.

Local environmentalists said the plant, which had been privatised several years ago, should have been modernised but that the company put profits first.

Robert Fidrich, of Friends of the Earth in Hungary, said: "Now we, the public, will have to pay the real bill. You can forget about cleaning up those villages … nobody will be able to live there for 10 years or more. It has affected the lives of hundreds of people."

MAL Zrt said that, according to EU standards, the red sludge was not considered toxic waste, and added: "Management could not have noticed the signs of the natural catastrophe nor done anything to prevent it, even while carefully respecting technological procedures."

The national disaster unit defined the sludge as "a byproduct of alumina production", stating: "The thick, highly alkaline substance has a caustic effect on the skin. The sludge contains heavy metals, such as lead, and is slightly radioactive. Inhaling its dust can cause lung cancer."

Environmental activists said the incident had echoes of an environmental disaster in 2000, when a dam with toxic waste from the Baia Mare Aurul gold mine, in north-west Romania, burst. It released 100,000 cubic metres of waste water, heavily contaminated with cyanide, into tributaries of the Tisza river, which flows through Hungary.

What's in the sludge

Bauxite, the raw material from which aluminium is processed, contains a mix of minerals, including aluminium, iron oxides and titanium dioxides. It is dug out of the ground and washed with hot sodium hydroxide as part of the Bayer process, invented in the 19th century. This extracts the aluminium oxide, or alumina, from the ore that is subsequently used to produce pure aluminium. The waste, known as red mud, is a mix of solid impurities, heavy metals such as cadmium, cobalt and lead, and the processing chemicals. The caustic mixture can burn skin on prolonged contact and is an environmental liability, difficult to store. Red mud is also classed as a "technologically enhanced, naturally occurring radioactive material" – a substance produced when processing of raw materials concentrates or exposes radioactive materials. Alok Jha