The lake in eastern Hualien county -- formed by series of landslides that created a natural dam wall -- burst Tuesday, washing away a bridge and sweeping into a town with a trail of thick sludge and mud.
"It was like a volcano erupting.... the muddy floodwaters came roaring straight into the first floor of my house," Hsu Cheng-hsiung, 55, a neighbourhood leader of Guangfu township, told AFP.
The death toll in Hualien rose to 17 from 14, while the number of missing fell from 152 to 17 as most people have been located, the National Fire Agency said.
"Seventeen people remain missing after the Mataian Creek barrier lake burst. We must... seize the time for rescue," interior minister Liu Shyh-fang said at a government briefing.
She said the government continued to monitor the barrier lake even though rainfall was expected to ease from Wednesday evening.
The water level of the lake had fallen by 75 percent, the semi-official Central News Agency reported, citing the government.
In Guangfu town, the streets were caked in thick grey mud after the flood hit, with fallen trees blocking the way, an AFP journalist saw.
Wrecked cars and scooters lay by the roadside or piled on top of each other by the flood waters, and some metal gates and roofs of homes were destroyed, with furniture scattered along the streets.
Residents said the mud was too much to clear by themselves with more help for the cleanup expected Thursday.
"I was very scared... About 500 metres in front of me, the stream suddenly swelled into a flood," said Shih Hui-mei, a 54-year-old relief volunteer.
"I heard police broadcasting on the street, 'the water is coming, run!'," she told AFP at a make-shift shelter.
"Our township has many elderly people... we rescued many of them from being trapped alone."
Premier Cho Jung-tai visited the area, pledging to provide assistance to those affected.
He said the authorities should find out why "evacuation orders were not carried out in the affected area" which led to the casualties.
Local resident Yen Shau, 31, described the flood as a "disaster movie".
"Within minutes, the water had risen to halfway up the first floor," he said.
He said he couldn't sleep Tuesday night for fear of another deluge from the lake, and on Wednesday was shovelling mud from his home.
"The mud was just too deep, too deep to dig out," he added.
Across Taiwan, nearly 8,400 people were evacuated due to Typhoon Ragasa.
In areas around the barrier lake, 3,285 people were evacuated and around 1,200 were staying in shelters, according to fire agency.
Taiwan experiences frequent tropical storms from July to October.
Typhoon Danas, which hit the island in early July, killed two people and injured hundreds as the storm dumped more than 50 centimetres of rain across the south over a weekend.
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