* Japan watchdog fears operator can't cope in some respects
* Watchdog also concerned more tanks might leak radioactive water
* China says it "shocked" to hear plant still leaking contaminated water
* Contamination levels worst since plant destroyed by quake, tsunami
By Kiyoshi Takenaka and James Topham
TOKYO, Aug 21 (Reuters) - Japan's nuclear crisis escalated to its worst level in two years on Wednesday, with its nuclear watchdog saying it feared more tanks were leaking contaminated water and China expressing its shock over the disaster.
Japan's nuclear regulator also said it feared the disaster exceeded the ability of the plant's operator, Tokyo Electric Power Co, to cope "in some respects".
A spokesman for the Nuclear Regulation Authority (NRA) said earlier on Wednesday the agency plans to upgrade the severity of the crisis from a level 1 "anomaly" to a level three "serious incident" on an international scale for radiological releases.
Such a move would be the most serious action taken since the plant was destroyed by an earthquake and tsunami in 2011.
"Any way you look at it, this is deplorable," Chief Cabinet Secretary Yoshihide Suga said at a regular news conference on Wednesday. "The government will make every effort to halt the leak of contaminated water as soon as possible."
The plant operator, also known as Tepco, said on Tuesday contaminated water with dangerously high levels of radiation is leaking from a storage tank.
The NRA said it was worried about leakage from other tanks of the same type, which were built hastily to store water washed over melted reactors at the station to keep them cool.
China said it was "shocked" to hear that Fukushima was still leaking contaminated water two years after the disaster and urged Japan to provide information "in a timely, thorough and relevant way".
"We hope that the Japanese side can earnestly take effective steps to put an end to the negative impact of the after-effects of the Fukushima nuclear accident," China's Foreign Ministry said in a statement faxed to Reuters in Beijing.
Water in the latest leak is so contaminated that a person standing close to it for an hour would receive five times the annual recommended limit for nuclear workers in a year.
Tepco has been criticised for its failure to prepare for the disaster and been accused of covering up the extent of the problems at the plant.
"This certainly exceeds Tokyo Electric's ability in some respects," NRA chairman Shunichi Tanaka told a media briefing after a regular meeting of the NRA commission. He had been asked whether the operator could handle the crisis.
Upgrading the warning to level 3 will mark the first time Japan has issued a warning on the International Nuclear Event Scale (INES) since three reactor meltdowns at the plant after a massive earthquake and tsunami in March 2011.
A maximum INES level 7 was declared at the battered plant after explosions led to a loss of power and cooling two years ago, confirming Fukushima as the worst nuclear accident since Chernobyl a quarter of a century earlier..
Each one-step INES increase represents a tenfold increase in severity, according to a factsheet on the website of the International Atomic Energy Agency. (www.iaea.org/)
The level 3 rating is assigned when there is exposure of more than 10 times the limit for workers, according to the factsheet.
It can also be assigned when there is "severe contamination in an area not expected by design with a low probability of significant public exposure," the factsheet says.
The NRA's impending assessment upgrade came in a document posted on the agency's website on Wednesday, with formal adoption to follow notification to the International Atomic Energy Agency (IAEA).
"Judging from the amount and the density of the radiation in the contaminated water that leaked ... a level 3 assessment is appropriate," the document said.
The NRA's Tanaka said the regulator has decided to consult with the IAEA about whether it is appropriate to assign a rating to the leakage at the plant. The IAEA has so far not commented on the latest developments.
The leak is so contaminated that a person standing 50 cm (1.6 feet) away that, after 10 hours, a worker in that proximity to the leak would develop radiation sickness with symptoms including nausea and a drop in white blood cells.