Taiwanese petrochemical company LCY has been blamed for a series of deadly explosions that killed 28 people on July 31 in Kaohsiung.
LCY failed to shut off a pipeline despite detecting a drop in pressure, officials said.
The company said it will cooperate with the investigation.
The search for two missing firemen is continuing, though there is little hope that they will be found alive.
Almost 300 people were injured in the explosions, which left a trail of devastation in the centre of the city.
Witnesses reported huge fireballs soaring into the air. Officials said there were at least five blasts.
A statement from Kaohsiung city authorities said that LCY had known about the drop in pressure but had continued to transmit propylene gas.
By the time it shut off the supply, some 100 tons of propylene gas had already leaked into the ground.
Officials added that LCY failed to notify authorities of the leak in time, preventing a complete evacuation of the area.
Chen Chin-der, the director of Kaohsiung’s Environmental Protection Bureau, said authorities were only able to identify the gas minutes before the blasts started.
The CEO of LCY said that the company would accept full responsibility if it turned out to be at fault.
Taiwan’s President Ma Ying-jeou visited the site of the explosion on Saturday, and vowed a full investigation.
“Everyone is concerned about the cause of the incident and the cabinet has set up a task force to investigate and hope to find the cause in the shortest possible time” he said.
“Even though this incident happened in Kaohsiung, every Taiwanese person’s heart is hurt” he added.
Kaohsiung’s mayor, Chen Chu, said the explosions had “shocked residents tremendously”.
“I instructed relevant units to thoroughly inspect the pipelines and call for the central government to review how to properly locate them so residents do not live under invisible threats and to prevent another tragedy,” Chen Chu said in a statement.
Taiwan’s Premier Jiang Yi-huan announced three days of national mourning, to start on August 5.
Flags will be flown at half-mast at government buildings and schools, to mourn both the Kaohsiung blast victims as well as the 48 people who died in a plane crash last Wednesday.
Meanwhile, the search for two missing firemen is continuing, our correspondent Cindy Sui reports.
Sniffer dogs and sensor equipment are being used to search the rubble on one of the streets where the explosions took place.
The area where the explosions happened is just a short distance from the Kaohsiung City Hall, the popular Guanghua Night Market, the Shin Kong Mitsukoshi Department Store and at least one major hotel.
Eyewitnesses and local residents reported smelling a strong gas odor about three hours before the explosions occurred. Many of them were worried and went outside.
One person wrote online that he called Kaohsiung City’s hotline for residents but was told that firefighters had arrived on the scene and to go back home.
As he expressed anger to the hotline operator, he saw a large explosion. Manhole covers were blown three stories high. Many people lay injured on the street.
Another resident who lived nearby said that he thought it was an earthquake at first and then he heard something like a bomb. The electricity was cut off. He immediately woke up his wife and children and they quickly left their home.