Japan's nuclear agency has upgraded the severity level of a radioactive water leak at the Fukushima plant from one to three on an international scale.
Highly radioactive water was found to be leaking from a storage tank into the ground at the plant on Monday.
It was first classified as a level one incident on the International Nuclear and Radiological Event Scale (Ines).
But Japan's Nuclear Regulation Authority proposes elevating it to level three on the seven-point scale.
Japanese reports say it is a provisional move that had to be confirmed with the IAEA, the UN's nuclear agency.
This week is the first time that Japan has declared an event on the Ines scale since the 2011 earthquake and tsunami.
The move was announced in a document on the agency's website and was subsequently approved at a weekly meeting of the regulatory body.
Shares of plant operator Tokyo Electric Power Company (Tepco) fell as much as 13% to 537 yen as investors worried about the impact of the development.
The March 2011 tsunami knocked out cooling systems to the reactors at the plant, three of which melted down.
Water is now being pumped in to cool the reactors but this means that a large amount of contaminated water has to be stored on site.
There have been leaks of water in the past but this one is being seen as the most serious to date, because of the volume - 300 tonnes of radioactive water, according to Tepco - and high levels of radioactivity in the water.
Japan's Nuclear Regulation Authority (NRA) said it feared the disaster was "in some respects" beyond Tepco's ability to cope.
"We should assume that what has happened once could happen again, and prepare for more," watchdog chairman Shunichi Tanaka told a news conference. "We are in a situation where there is no time to waste."
He said Tepco had failed to spot the leak for days - maybe weeks - despite patrols that are supposed to check each storage tank twice every day. Workers had also left a tap open in the safety barrier that surrounds the base of the leaking storage tank.
That had allowed highly toxic water to trickle away into the ground. Latest reports from the plant suggest some of it may already have reached the nearby Pacific Ocean.
The BBC's Rupert Wingfield-Hayes in Tokyo says it all adds to the impression that the clean-up operation is riddled with complacency and incompetence.
A puddle of the contaminated water was emitting 100 millisieverts an hour of radiation, Kyodo news agency said earlier this week.
Masayuki Ono, general manager of Tepco, told Reuters news agency: "One hundred millisieverts per hour is equivalent to the limit for accumulated exposure over five years for nuclear workers; so it can be said that we found a radiation level strong enough to give someone a five-year dose of radiation within one hour."
Teams of workers at the plant have surrounded the leaking tank with sandbags and have been attempting to suck up large puddles of radioactive water.
But our correspondent says it is a difficult and dangerous job. The water is so radioactive that teams must be constantly rotated and it is clear that most of the toxic water has already disappeared into the ground.
Under the Ines, events have seven categories starting with Level 0 ("without safety significance") and Levels 1-3 denoting "incidents" while Levels 4-7 denote "accidents".
The triple meltdown at Fukushima two years ago was classed as a level 7 incident, one of only two nuclear events ever rated that highly - along with the 1986 Chernobyl disaster in the former Soviet Union.