Radiation around the Fukushima No.1 plant on the eastern coast had "risen considerably", Prime Minister Naoto Kan said, and his chief spokesman announced the level was now high enough to endanger human health.
In Tokyo, some 250 kilometres to the southwest, authorities also said that higher than normal radiation levels had been detected in the capital, the world's biggest urban area, but not at harmful levels.
Kan warned people living up to 10 kilometres beyond a 20 km exclusion zone around the nuclear plant to stay indoors.
The fire, which was later reportedly extinguished, was burning in the plant's number-four reactor, he said, meaning that four out of six reactors at the facility are now in trouble.
As well as the atomic emergency, Japan is struggling to cope with the enormity of the damage from Friday's record-breaking quake and the tsunami which raced across vast tracts of its northeast, destroying all before it.
The official death toll has risen to 2,414, police said today, but officials say at least 10,000 are likely to have perished.
The crisis at the ageing Fukushima plant has escalated daily after Friday's quake and tsunami which knocked out cooling systems.
On Saturday an explosion blew apart the building surrounding the plant's number-one reactor. On Monday, a blast hit the number-three reactor, injuring 11 people and sending plumes of smoke billowing into the sky.
Early today a blast hit the number-two reactor. That was followed shortly after by a hydrogen explosion which started a fire at the number-four reactor.
Chief government spokesman Yukio Edano said radioactive substances were leaked along with the hydrogen.
"What we most fear is a radiation leak from the nuclear plant," Kaoru Hashimoto, 36, a housewife living in Fukushima city 80 kilometres northwest of the stricken plant, told AFP by phone.
"Not much confirmed information is coming to us, so we are in trouble about how to cope with the situation." Hashimoto said supermarkets are open but shelves are completely empty. "Many children are sick in this cold weather but pharmacies are closed. Emergency relief goods have not reached evacuation centres in the city.
"I'm wondering how long we can manage with the food we have in stock. Everyone is anxious and wants to get out of town. But there is no more petrol. We are afraid of using a car as we may run out of petrol."
The UN's nuclear watchdog, the International Atomic Energy Agency, said Tokyo had asked for expert assistance in the aftermath of the quake which US seismologists are now measuring at 9.0-magnitude, revised up from 8.9.
But the IAEA's Japanese chief Yukiya Amano moved to calm global fears that the situation could escalate to rival the world''s worst nuclear crisis at Chernobyl in the Ukraine in 1986.
"Let me say that the possibility that the development of this accident into one like Chernobyl is very unlikely," he said.
Officials have already evacuated 210,000 people in the exclusion zone around the crippled plant.
At one shelter, a young woman holding her baby told public broadcaster NHK: "I didn't want this baby to be exposed to radiation. I wanted to avoid that, no matter what."
Further north in the region of Miyagi, which took the full brunt of Friday's terrifying wall of water, rescue teams searching through the shattered debris of towns and villages have found 2,000 bodies. And the Miyagi police chief has said he is certain more than 10,000 people perished in his prefecture.
Millions have been left without water, electricity, fuel or enough food and hundreds of thousands more are homeless and facing harsh conditions with sub-zero temperatures overnight, and snow and rain forecast.
Tokyo stocks, which were punished Monday when the markets reopened, sending indexes around the world sliding, plummeted another 12 per cent by early afternoon today.
Panic selling saw stocks close more than six per cent lower in Tokyo yesterday on fears for the world's third-biggest economy, as power shortages prompted rolling blackouts and factory shutdowns in quake-hit areas.
Kaori Ohashi, 39, a mother-of-two working in a nursing home for the elderly near the city of Sendai, spent two nights trapped in the building after its first floor was submerged by the tsunami.
"Snow started to fall and it became dark. We lost power. I thought ''This is a nightmare," Ohashi told AFP after she was rescued.
At least 1.4 million people in Japan were temporarily without running water and more than 500,000 were taking shelter in evacuation centres, said the UN's Office for the Coordination of Humanitarian Affairs.
At a hospital in the fishing town of Kesennuma hit by the tsunami, an official said basic supplies were desperately needed.
"We are critically short of water," he said. "Water is very important here. To save it, we need a lot of disposable dishes. We need blankets as well." Aid workers and search teams from across the world joined 100,000 Japanese soldiers in a massive relief push as the country suffers a wave of major aftershocks.
Leading risk analysis firm AIR Worldwide said the quake alone would exact an economic toll estimated at between USD 14.5 billion and USD 34.6 billion -- even leaving aside the effects of the tsunami.
AFP
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