A seven-mile lake formed by a massive landslide in north-east Pakistan is threatening to burst its banks and sweep through a valley, wiping out villages and endangering 45,000 people who live downstream.

Engineers are racing to build a channel at the top of the natural dam, formed by a landslide in early January which killed 19 people and blocked the Hunza River. This would let the water drain from the lake gradually. But they do not have much time. The water, which only a week or so ago was rising at a rate of 45cm a day, is now going up by a daily 30cm. Its growth is sure to accelerate as glaciers and snow caps in the nearby mountains start to melt.

The swelling waters of this huge lake – about as long as Ullswater, the Lake District's second-largest body of water – are now just 30 metres from the top.

Professor David Petley, of the International Landslide Centre at Durham University, warns there is "substantive risk of an outburst" as the water level approaches the top of the dam, with "the potential for a large flood wave to travel downstream as far as Tarbela Dam", 50km northwest of Islamabad.

He says: "When the water reaches the top there are two scenarios. One, water goes into the channel that the army are cutting and there's no flood. It sounds like an attractive prospect but you have a huge body of water behind a landslide dam. Two, if the water goes, it would be caught by the Tarbela dam downstream – and the reservoir there is low because of the drought in Pakistan – but as many as 45,000 people are in danger of a flood wave. A wave could be 40 metres high, or even more, as it goes down the valley."

The dammed river, from which the lake has formed, runs through the fertile Hunza Valley, the former mountain kingdom renowned as the fabled Shangri-La, and feeds into the mighty Indus river on which the Tarbela dam lies. The expanding lake has already displaced more than 1,600 people in surrounding villages and the waters are encroaching on several more villages.

People now watch helplessly as the waters rise. Shah Makeen, a fruit seller from Shiskat, a village a few kilometres east of the landslide, closer to the Chinese border, said at the end of March, when I visited the area, that his home is slowly being engulfed by the massive lake.

At that point, the waters were lapping at the village of Gulmit, and had already flooded the orchards of tourist hotels located near the river. Makeen said: "I would say that in another two weeks most of Ayeenabad will be flooded. The water has even reached Gulmit now. People are very upset."

Focus Humanitarian Assistance, a charity affiliated with the Aga Khan Development Network, is setting up an early-warning system to alert villagers downstream in case the dam shows signs of collapse. They have built a monitoring camp above the lake to check for cracks and have installed CCTV and night lights to monitor seepage or any unusual activity in the dam.

Professor Petley says more needs to be done. In his report he writes: "While constructing the spillway is undoubtedly an appropriate first step, a great deal more work is urgently required in terms of management of the hazard... The downstream communities are facing a risk that is not tolerable – immediate action is required at a national level to protect the population between Attabad and Tarbela Dam."

But for people such as Afsar Jan from Shiskat, who is watching the waters submerge his home, the authorities have done too little too late. "They should have done more sooner," he says. "Our future is being destroyed in front of our very eyes."

The villagers, mostly Ismaili Muslims whose spiritual leader is the Aga Khan, are losing their homes, orchards and fields as the waters rise. And the lake has not only taken people's land away, it has also cut off the 25,000 population living in the Gojal region of Hunza from the rest of the country and severed a vital trading route with China.

Submerged beneath the icy water is a vital 10km stretch of the famous Karakoram Highway (KKH), the highest road in the world which snakes through the mountain ranges of the Hindu Kush, the Karakorams and the Himalayas, linking China and Pakistan. The route is not expected to reopen for months.

Professor Petley says: "The 25,000 or so people on the north side of the blockage are stranded. They have no access to the road but for the rickety old boats that are taking them across the lake to the dam. Without them, they'd be cut off from the outside world. There is a serious problem supplying them with food and medicine. People on the north side of the barrier are suffering badly. The boats are totally inadequate. There does need to be some more assistance."

The only way for people to get to the KKH from upstream of the landslide is a one-hour journey across the lake by boat and then over the 1.5km landslide on foot. The journey takes a whole day as there are not many boats and they operate only in daylight. The people complain there are insufficient boats, although the army plans to start operating large rafts which can transport more goods and even small jeeps. There are no food shortages but people are relying on aid.

Bibi Shawar, who is currently living in a makeshift camp in Ayeenabad, said: "In the beginning there were only around two boats. I know of a woman and her new-born baby who both died because there was no boat to take them to a hospital in time.

"In the Punjab [a southern state in Pakistan], a woman delivered a baby in a rickshaw and the media made such a fuss that she was compensated 500,000 rupees (£7,350). Here, even the boats they give us are leaky and unsafe."

More than 100,000 cubic metres of debris have already been moved by the bulldozers but a further 112,500 cubic metres still need to be lifted. At the site of the landslide, four large diggers, borrowed from the Chinese contractors who were working on widening the Karakoram Highway, are lifting clay, rocks and soil from the landslide to build the spillway channel. The work is being carried out by engineers from the Frontier Works Organisation, which built and maintains the Karakoram Highway.

Farooq Ahmad Khan, a retired major general who chairs Pakistan's National Disaster Management Authority, said: "The landslide occurred on 4 January this year and on 5 January I was at the site along with my team. We led the rescue operation in the area. To date, the Pakistani army has flown 635 helicopter sorties to the affected area, dropping off 153 tons of food items and 438 cartons of medicines."

In his view, the work to open the spillway is on track, given the scale of the landslide, and it should be completed by 15 April unless the boulders are so big they require blasting. "In the beginning it was very tricky work. We first had to make an access path for the bulldozers over all the slush, which took time," he said.