The Xinhua news agency said illegally high traces of melamine were found in products sold by the Shanghai Panda Dairy Company.
It is the second case of melamine-tainted milk to emerge in the past month, and comes over a year after a milk powder from China laced with melamine killed six people and sickened an estimated 300,000. That event culminated in the bankruptcy of state-owned dairy Sanlu and the execution of two people in November last year.
In the latest case, Chinese authorities have sealed off Shanghai Panda warehouses and are overseeing the recall of its products from Shanghai and seven other regions.
Shanghai Panda was one of 22 companies to be implicated in the 2008 scandal and was briefly closed back then. The Wall Street Journal said Shanghai Panda was even selling milk powder that it had recalled in 2008 and should have destroyed. The newspaper added that local media reports indicate that the Chinese health authorities suspected the company long before they took action.
All this raises questions about the determination of Chinese industry to reform and the ability of authorities to control the problem.
Following the 2008 scandal, China has passed food-safety laws establishing standards, better testing systems and a method to recall problem products.
But the new law, which went into effect in June, has so far failed to prevent the sale melamine laced products.
In addition to the Shanghai Panda case, Chinese state media reported in December that three people from the Shaanxi Jinqiao Dairy Co, in northern Shaanxi province, have been detained and accused of producing and selling over 5 tonnes of melamine tainted milk powder.