Biaoxin Chemical Company caused "massive" tap water pollution in Yancheng, a city in east Jiangsu province, forcing the closure of two out of three tap water plants, the official Xinhua News Agency said.
Water supplies were restored after a five-hour shutdown Friday, Xinhua said.
There were no reports of immediate health problems and the Yancheng government Web site posted a notice Saturday saying that drinking water is safe.
Investigators identified the pollutant as a phenol compound used to make products including air fresheners, medical ointments, cosmetics and sunscreens.
The Beijing News newspaper said that hundreds of thousands of people had their water cut.
In recent years, a series of high-profile industrial accidents along major rivers have disrupted water supplies to big cities, as the nation's booming economy brought more heavily polluting industries.
Local police have "controlled" the owners of the Biaoxin Chemical Company, Xinhua said, without giving further details. The term in Chinese is vague but implies the owners were detained.
Last year, heavy pollution turned portions of the Han river, a branch of the Yangtze, in central Hubei province red and foamy, forcing the government to cut water supplies to as many as 200,000 people.
In 2005 in one of China's worst cases of river pollution, carcinogenic chemicals, including benzene, spilled into the Songhua River. The northeastern city of Harbin was forced to sever water supplies to 3.8 million people for five days. The accident also strained relations with Russia, into which the poisoned waters flowed.
The country's cites are among the world's smoggiest, and the government says its major rivers, canals and lakes are badly polluted by industrial, agricultural and household pollution, with 200 million rural inhabitants without access to safe drinking water in 2008.