A Chinese oil giant was to blame for a toxic leak that contaminated tap water in a northwestern city, leading panicked residents to clear stores of bottled water, state media said Saturday.

Tests conducted on Thursday and Friday showed that tap water in Lanzhou, the capital of Gansu province, had as much as 200 micrograms of the toxic chemical benzene per litre -- 20 times the national limit -- the official Xinhua news agency said, citing local environment authorities.

A subsidiary of China's largest oil company, China National Petroleum Company (CNPC), was to blame after crude oil leaked from its pipeline into the source for a local water plant, Xinhua reported Saturday.

The leak came from a Lanzhou Petrochemical pipeline and led to the hazardous levels of benzene in the city's tap water, Xinhua said, citing a local environment official.

Benzene is an aromatic, colourless liquid and a basic raw material used in the petrochemical industry. Human exposure to the chemical increases the risk of cancer and other illnesses.

Investigators found crude oil in soil along a duct between two water works owned by Veolia Water, a joint Sino-French venture and the sole water supplier for urban Lanzhou, Xinhua reported.

The environment official said the leak had been located, and repairs were under way.

The report did not say whether any action would be taken against CNPC.

Part of the city suspended its tapwater supply and residents hurried to supermarkets to snap up bottled water after the excessive levels of benzene were reported Friday.

Stores and supermarkets ran out of water and many people complained of thirst, Xinhua said, with fire engines delivering emergency supplies to downtown neighbourhoods.

By 11:00 am Saturday (0300 GMT), benzene levels were confirmed safe at five out of the six tap water monitoring sites in Lanzhou, the agency said.

Many waterways in China have suffered heavy contamination of toxic waste from factories and farms -- pollution blamed on more than three decades of rapid economic growth and lax enforcement of environmental protection laws.

In one serious environmental scandal in January 2012, factories contaminated water supplies serving millions of people with toxic cadmium and other waste in the southwestern city of Guangxi.