Their heads are too large or too small, their limbs too short or too bent. For some, their brains never grew, speech never came and their lives are likely to be cut short: these are the children it appears that India would rather the world did not see, the victims of a scandal with potential implications far beyond the country's borders.

Some sit mutely, staring into space, lost in a world of their own; others cry out, rocking backwards and forwards. Few have any real control over their own bodies. Their anxious parents fret over them, murmuring soft words of encouragement, hoping for some sort of miracle that will free them from a nightmare.

Health workers in the Punjabi cities of Bathinda and Faridkot knew something was terribly wrong when they saw a sharp increase in the number of birth defects, physical and mental abnormalities, and cancers. They suspected that children were being slowly poisoned.

But it was only when a visiting scientist arranged for tests to be carried out at a German laboratory that the true nature of their plight became clear. The results were unequivocal. The children had massive levels of uranium in their bodies, in one case more than 60 times the maximum safe limit.

The results were both momentous and mysterious. Uranium occurs naturally throughout the world, but is normally only present in low background levels which pose no threat to human health. There was no obvious source in the Punjab that could account for such high levels of contamination.

And if a few hundred children – spread over a large area – were contaminated, how many thousands more might also be affected? Those are questions the Indian authorities appear determined not to answer. Staff at the clinics say they were visited and threatened with closure if they spoke out. The South African scientist whose curiosity exposed the scandal says she has been warned by the authorities that she may not be allowed back into the country.

But an Observer investigation has now uncovered disturbing evidence to suggest a link between the contamination and the region's coal-fired power stations. It is already known that the fine fly ash produced when coal is burned contains concentrated levels of uranium and a new report published by Russia's leading nuclear research institution warns of an increased radiation hazard to people living near coal-fired thermal power stations.

The test results for children born and living in areas around the state's power stations show high levels of uranium in their bodies. Tests on ground water show that levels of uranium around the plants are up to 15 times the World Health Organisation's maximum safe limits. Tests also show that it extends across large parts of the state, which is home to 24 million people.

The findings have implications not only for the rest of India – Punjab produces two-thirds of the wheat in the country's central reserves and 40% of its rice – but for many other countries planning to build new power plants, including China, Russia, India, Germany and the US. In Britain, there are plans for a coal-fired station at the Kingsnorth facility in Kent.

The victims are being treated at the Baba Farid centres for special children in Bathinda – where there are two coal-fired thermal plants – and in nearby Faridkot. It was staff at those clinics who first voiced concerns about the increasing numbers of admissions involving severely handicapped children. They were being born with hydrocephaly, microcephaly, cerebral palsy, Down's syndrome and other complications. Several have already died.

Dr Pritpal Singh, who runs the Faridkot clinic, said the numbers of children affected by the pollution had risen dramatically in the past six or seven years. But he added that the Indian authorities appeared determined to bury the scandal. "They can't just detoxify these kids, they have to detoxify the whole Punjab. That is the reason for their reluctance," he said. "They threatened us and said if we didn't stop commenting on what's happening, they would close our clinic.

"But I decided that if I kept silent it would go on for years and no one would do anything about it. If I keep silent then the next day it will be my child. The children are dying in front of me."

Dr Carin Smit, the South African clinical metal toxicologist who arranged for the tests to be carried out in Germany, said that the situation could no longer be ignored. "There is evidence of harm for these children in my care and... it is an imperative that their bodies be cleaned up and their metabolisms be supported to deal with such a devastating presence of radioactive material," she said.

"If the contamination is as widespread as it would appear to be – as far west as Muktsar on the Pakistani border, and as far east as the foothills of Himachal Pradesh – then millions are at high risk and every new baby born to a contaminated mother is at risk."

In the Faridkot centre last week, Harmanbir Kaur, 15, was rocking gently backwards and forwards. When her test results came back, they showed she had 10 times the safe limit of uranium in her body. Her brother, Naunihal Singh, six, has double the safe level.

Harmanbir was born in Muktsar, 25 miles from Faridkot. Her mother, Kulbir Kaur, 37, watched her slowly degenerate from a healthy baby into the girl she is today, dribbling constantly, unable to feed herself, lost in a world of her own. "God knows what sin I have committed. When we go to our village people say there is a curse of God on you, but I don't believe so," she said. "Every part of this area is affected. We never imagined that there would be uranium in our kids."

A few miles down the road in Bathinda, Sukhminder Singh, 48, a farmer, watched his son Kulwinder, 13, staring into space while curling his hands up under his chin. Tests showed Kulwinder has 19 times the maximum safe level of uranium in his body. He has cerebral palsy and has already had seven operations to unbend his arms and legs.

"The government should investigate it because if our child is affected it will also affect future generations," he said. "What are they waiting for? How many children do they want to be affected? Another generation? I can leave the house for work, but my wife is always with him. Sometimes she cries and asks why God is playing with our luck. Every morning he sends a new trouble."

Doni Choudhary, aged 15 months, is waiting to be tested, though staff say he shows similar symptoms to those who have tested positive and are treating him for suspected uranium poisoning. His mother, Neelum, 22, from the state capital, Chandigarh, says he was born with hydrocephaly. His legs are useless.

"He is dependent on others. After me, who can care for him?" Neelum asks. "He tries to speak but he can't express himself and my heart cries. When will he understand that his legs don't work? What will he feel?"

India's reluctance to acknowledge the problem is hardly unexpected: the country is heavily committed to an expansion of thermal plants in Punjab and other states. Neither was it any surprise when a team of scientists from the Department of Atomic Energy visited the area and concluded that while the concentration of uranium in drinking water was "slightly high", there was "nothing to worry" about. Yet some tests recorded levels of uranium in the ground water as high as 224mcg/l (micrograms per litre) – 15 times higher than the safe level of 15mcg/l recommended by the WHO. (The US Environmental Protection Agency sets a maximum safe level of 20mcg/l.)

Some scientists have proposed that the ground water may have been contaminated by contact with granite rocks that rise above the ground about 150 miles away to the south in the Tosham hills, in Haryana state. A continuation of these rocks is believed to run deep below the thick alluvial deposits that form the plains of Punjab.

Increasing demands for water, in particular to irrigate the rice crop, have led to greater dependence on tube wells. That in turn is depleting the water table in the state at an alarming rate – by at least 30cm a year, according to one study – with the result that water is being drawn from ever deeper levels. However, this theory seems to be in conflict with evidence from parents of many of the children, who say they use the mains supply, which comes from other sources.

There have also been claims that the contamination may have been exacerbated by depleted uranium carried on the wind from the wars in Iraq and Afghanistan. At a seminar in Amritsar in April, Admiral Vishnu Bhagwat, a former chief of the naval staff, suggested that areas within a 1,000-mile radius of Kabul – including Punjab – may be affected by depleted uranium. Although the prevailing monsoon winds blow either from the north-east or the south-west, there are times when a depression originating in the Mediterranean can result in rainfall in Punjab.

Meanwhile, smoke continues to pour from the power station chimneys and lorries shuttle backwards and forwards, taking away the fly ash to be mixed into cement at the neighbouring Ambuja factory. Inside the plant last week, there was ash everywhere, forming drifts, clinging to the skin, getting into the throat.

Ravindra Singh, the plant's security officer, said that most of the ash went to the cement works, while the rest was dumped in ash ponds. It would be more efficient to burn better quality coal that left less ash, he said. Every day the plant burned 6,000 tons of coal. He had no idea how much ash that generated, but the stream of lorries to take it away was continuous.

The first coal-fired power station in Punjab was commissioned in Bathinda in 1974, followed by another in nearby Lehra Mohabat in 1998. There is a third to the east, at Rupnagar.

Tests on ground water in villages in Bathinda district found the highest average concentration of uranium – 56.95mcg/l – in the town of Bucho Mandi, a short distance from the Lehra Mohabat ash pond. Such a concentration of uranium means the lifetime cancer risk in the village was more than 153 times higher than in the normal population. Tests on ground water in the village of Jai Singh Wala, close to the Bathinda ash pond, showed an average level of 52.79mcg/l. People living there said they used the ash to spread on the roads and even on the floors of their homes.

Scientists in Punjab who have studied the presence of uranium in the state have dismissed the government denials as a whitewash. "If the government says there is a high level of uranium in an area that would create havoc – they don't want to openly say something like that," said Dr Chander Parkash, a wetland ecologist working at Guru Nanak Dev University, Amritsar.

Both he and Dr Surinder Singh, who works at the same university and has also carried out tests on the state's ground water, said it was clear that uranium was present in large quantities and should be investigated further.

Another scientist, Dr GS Dhillon, a former chief engineer with the irrigation department, is convinced that the uranium has come from the power stations and accuses the authorities of failing to control the ash ponds, which he believes have contaminated the ground water.

Their concerns are bolstered by a report from the Kurchatov Institute in Moscow, Russia's leading state organisation for nuclear research, published last month in the Russian Academy of Sciences' Thermal Engineering journal. The report's author, DA Krylov, raised serious doubts about the safety of coal-fired thermal power stations (TPSs), concluding that radiation from ash residues and from chimney emissions built up around coal-fired power plants and posed an additional risk to those living and working in the area.

"Natural radionuclides contained in coals concentrate in ash-and-slag wastes and gas-aerosol emissions as these coals are fired at TPSs, with the result that an elevated man-made radiation background builds up around TPSs," the report stated. The situation became worse, the report said, if ash was used as a construction material or as a filling material for roads.

A previous report in the magazine Scientific American, citing various sources, claimed that fly ash emitted by power plants "carries into the surrounding environment 100 times more radiation than a nuclear power plant producing the same amount of energy", adding: "When coal is burned into fly ash, uranium and thorium are concentrated at up to 10 times their original levels."