The Three Gorges dam, the flagship of China's massive hydroengineering ambitions, faces "urgent problems", the government has warned.

In a statement approved by prime minister Wen Jiabao, the state council said the dam had pressing geological, human and ecological problems. The report also acknowledged for the first time the negative impact the dam has had on downstream river transport and water supplies.

Since the start of construction in 1992 about 16m tonnes of concrete have been poured into the giant barrier across the Yangtze river, creating a reservoir that stretches almost the length of Britain and drives 26 giant turbines.

The world's biggest hydropower plant boasts a total generating capacity of 18,200MW and the ability to help tame the floods that threaten the Yangtze delta each summer.

But it has proved expensive and controversial due to the rehousing of 1.4 million people and the flooding of more than 1,000 towns and villages. Pollution, silt and landslides have plagued the reservoir area. Given the 254bn yuan (£24bn) cost and political prestige at stake, the government focused for many years on the dam's achievements and attempted to stifle domestic criticism of the project. But its public analysis has become increasingly sober.

A statement on the government's website read: "At the same time that the Three Gorges project provides huge comprehensive benefits, urgent problems must be resolved regarding the smooth relocation of residents, ecological protection and geological disaster prevention."

There were few specifics but China's cabinet, the state council, admitted several problems had not been foreseen.

"Problems emerged at various stages of project planning and construction but could not be solved immediately, and some arose because of increased demands brought on by economic and social development," the statement said.

Since the 1.5 mile barrier was completed in 2006 the reservoir has been plagued by algae and pollution that would previously have been flushed away.

The weight of the extra water has also been blamed for tremors, landslides and erosion of slopes.

To ease these threats the government said last year many more people may have to be relocated. This week it promised to establish disaster warning systems, reinforce riverbanks, boost funding for environmental protection and improve benefits for the displaced.

This is not the first warning. Four years ago the state media quoted government experts who said: "There are many new and old hidden ecological and environmental dangers concerning the Three Gorges dam. If preventive measures are not taken the project could lead to a catastrophe."

Last year, site engineers recommended an additional movement of hundreds of thousands of nearby residents and more investment in restoring the ecosystem.

The government has already raised its budget for water treatment plants but opponents of the dam say this is not enough. "The government built a dam but destroyed a river," said Dai Qing, a longtime critic of the project. "No matter how much effort the government makes to ease the risks, it is infinitesimal. The state council is spending more money on the project rather than investigating fully. I cannot see a real willingness to solve the problem."

The timing of the statement – as the government prepares to flesh out the details of its latest five-year plan – has prompted speculation of a possible push back against hydropower interests.

Peter Bosshard of International Rivers said: "While powerful factions within the government are pushing for the rapid expansion of hydropower projects, others are warning of the social and environmental cost of large dams and the geological risks of building such projects in seismically active regions.

"By highlighting the unresolved problems of the Three Gorges dam now, Premier Wen Jiabao, who has stopped destructive projects in the past, may be sending a shot across the bow of a zealous hydropower lobby which would be only too happy to forget about the lessons of the past."

The frank assessment of the challenges posed and benefits offered by the dam came amid growing concerns about a drought on the middle stretches of the Yangtze. This has left 1,392 reservoirs in Hubei with only "dead water" and has affected the drinking supplies of more than 300,000 people.

Chinese media reported this month that the Yangtze water levels near Wuhan hit their lowest point since the dam went into operation in 2003. Long stretches have apparently been closed to water traffic after hundreds of boats ran aground in the shallows.

There have been claims that the Three Gorges plant has exacerbated the problem by holding back water for electricity generation, but operators claim they have alleviated the problem by releasing 400m cubic metres of water from the reservoir. As a result the levels have fallen below 156 metres – the amount needed for optimum power generation.