Fears of another explosion at a Japanese nuclear plant are growing after officials said the cooling system in a second reactor had failed.

Thousands of people were evacuated on Saturday following an explosion and leak from the Fukushima Daiichi plant, 240 km (150 miles) north of Tokyo.

It was believed the first explosion had been contained and disaster avoided.

But on Sunday the plant operator, Tokyo Electric Power (TEPCO) said radiation levels around the Fukushima Daiichi plant had risen above the safety limit and said the cooling system in the number three reactor had failed.

It was preparing to vent steam to relieve pressure in the reactor and the government had warned of a rise in radiation during the procedure.

Fears of a nuclear fallout were first raised when a massive explosion rocked the Fukushima Daiichi atomic power plant following damage to the number one reactor in Friday's earthquake.

A pall of grey-white smoke rose over the plant, operated by Tokyo Electric Power, and it was reported that four workers had been injured.

Government officials revealed plans to distribute iodine tablets – a treatment for radiation poisoning – to locals while a 20km exclusion zone was set up round the plant.

Residents outside the zone were urged to stay inside, close doors and windows and turn off air conditioning. Scientists had detected eight times the normal radiation levels outside the facility and 1,000 times normal levels inside the affected unit's control room.

Japan's prime minister, Naoto Kan, declared a state of emergency at the crippled unit and at its sister plant, the Fukushima Daini, as engineers tried frantically to determine whether the reactor had gone into meltdown.

Japan's nuclear safety agency said the number of people exposed to radiation could reach 160. Officials said radiation levels around the plant had breached saftey levels.

Workers in protective clothing were scanning people arriving at evacuation centres for radioactive exposure.

The chief cabinet secretary Yukio Edano told a news briefing: "They are working on relieving pressure and pumping in water into the number three reactor.

"This will result in some radiation leakage, although at a level that won't affect peoples' health. It will help stabilise the situation."

He also said radiation from the number one reactor was "low enough not to affect people's health".

For locals in Fukushima prefecture, still reeling from frequent aftershocks and clearing up after the first disaster, the prospect of another on the way in the form of nuclear meltdown was unwelcome in the extreme.

"It is frightening. You get used to living with the nuclear plants and then something like this happens. When I saw smoke from the plant, I thought, 'Uh oh'," said Kato Tomiyama, a convenience store employee.

"I couldn't believe it," said Seiko Sato, a teacher. "We need more information."

A loss of coolant inside the first of the plant's six reactors had caused a dangerous build-up of heat. A second, more deadly explosion – one that would have released a vast radioactive plume over the nation – seemed a real prospect until it was announced that, although the outer structure of the 40-year-old reactor building had been blown off by the blast, the actual reactor inside had not been breached.

It was confirmed that radioactive caesium, one of the elements released when overheating causes core damage, had been detected around the plant. The discovery indicates that meltdown, caused by a nuclear reaction running out of control, had affected the first reactor's fuel rods – although possibly only to a limited extent. The revelation did little to reassure local people.

"Everyone wants to get out of the town, but the roads are terrible," said Reiko Takagi, a middle-aged woman, standing outside a taxi company. "It is too dangerous to go anywhere. But we are afraid that winds may change and bring radiation towards us."

Tthe operators of the Fukushima plant announced they had started to fill the containment vessels in which the reactor rests with sea water in a bid to cool it down, a process that would take from five to 10 hours, an official told reporters.

It was also revealed that the International Atomic Energy Agency was planning an investigation. "We are aware of the media reports and we are urgently seeking further information," an IAEA official told Reuters in Vienna.

In the wake of the impact of Friday's earthquake and tsunami, the Fukushima incident has strained life in Japan to an almost unendurable level, and although catastrophe appears to have been averted the incident has raised serious concerns about Japan's enthusiastic use of nuclear energy.

Reactors generate almost a third of the country's electricity and there are plans, already well advanced, to raise this to 50%. For the nuclear industry, the Fukushima incident could not have come at a worse time. Unravelling what happened and how close the nation came to disaster will preoccupy scientists and engineers for years.

It will be a complex business, as John Luxat, professor of nuclear safety analysis at McMaster University in Ontario, makes clear. "When the quake hit the reactors at Fukushima, three were up and running – the other three were shut down for regular inspection," he said.

"The three that were running shut down immediately, as they are designed to do when the ground shakes above a certain level. After that, the emergency back-up diesel generators that provide electricity to the shutdown cooling system operated as designed for about an hour. Then they failed for some reason that's not clear. They lost power to the pumps providing cooling water."

Last night reports suggested that the emergency pumps had failed because they had been swamped by the tsunami triggered by the initial earthquake – an embarrassing failure by those who had planned the reactor's back-up systems.

Whatever the reason, the consequences were dramatic. Without pumps taking away the water that acted as the coolant, the reactors heated up and steam built up inside.

"To reduce the pressure, you would have to release some steam into the atmosphere from the system," said Paddy Regan, professor of nuclear physics at Surrey University. "In that steam, there will be small but measurable amounts of radioactive nitrogen 16 [produced when neutrons hit water]. This remains radioactive for only about five seconds, after which it decays to natural oxygen."

The steam that built up inside the damaged reactor was released into the reactor housing, outside the containment vessel. The aim was to vent it, but before that could happen there was an explosion. A huge cloud of smoke erupted from the plant, injuring a number of workers.

Government spokesman Yukio Edano said that the explosion had destroyed the exterior walls of the building where the stricken reactor is located, but not the actual metal housing that enveloped the reactor.

However, it is still possible the reactor could have sustained serious damage. If its fuel rods reached too high a temperature, they would have melted at least partly. "If any of the fuel rods have been compromised, there would be evidence of a small amount of other radioisotopes in the atmosphere called fission fragments – radiocaesium and radioiodine," said Regan.

"The amount that you measure would tell you to what degree the fuel rods have been compromised. Scientists in Japan should be able to establish this very quickly using gamma ray spectroscopy as the isotopes have characteristic decay signatures."

Despite the revelation that caesium had been detected, Japanese officials still claim the reactor's container was not damaged and that radiation levels have started to fall. However, the Japanese nuclear industry has a bad reputation for owning up to accidents and many observers remain cautious about accepting these claims too quickly.

Professor Malcolm Sperrin, director of medical physics and clinical engineering at Royal Berkshire hospital, said: "There is a lot we don't know at the moment, but this looks very serious. However, there are a number of things that we should remember. The big difference between something like this and previous accidents elsewhere in the world is that there will be mechanisms in place to deal with the explosion and any impacts it might have. And although there is a lot we don't know, it is very unlikely that this was an explosion involving the core."

Naoto Sekimura from Tokyo University insisted there was little chance that Japan came close to a Chernobyl-style meltdown. "No Chernobyl is possible at a light water reactor," he said. "Loss of coolant means a temperature rise, but it also will stop the reaction. Even in the worst-case scenario, that would mean some radioactive leakage and equipment damage, but not an explosion.

Those opposed to nuclear power will not let the incident be forgotten, as Jan Beranek, head of Greenpeace's international nuclear campaign, made clear. "How many more warnings do we need before we finally grasp that nuclear reactors are inherently hazardous? The nuclear industry always tells us that situation like this cannot happen with modern reactors, yet Japan is currently in the middle of a potentially devastating nuclear crisis," he said.