No one was injured in Monday evening's incident at SaxaVord Spaceport on the remote island of Unst, said the operator, German rocket manufacturer Rocket Factory Augsburg (RFA).
The company hopes to launch the UK's first vertical rocket into orbit from there later this year. Monday's failed test was one of the trials in the run-up to the launch.
It comes three months after RFA held its first engine test at the site, which was declared a success.
"On Monday evening, RFA conducted a hot fire of its first stage at their launch site at SaxaVord Spaceport," said a spokesperson for the German company.
"This resulted in an anomaly that led to the loss of the stage. No-one was injured in the process.
"The launch pad has been saved and is secured, the situation is under control and any immediate danger has been mitigated."
A spokesperson for SaxaVord said it "will work with RFA to understand and learn from the causes and support them as they move forward to the next phase of their preparations".
SaxaVord is the first fully licensed vertical launch spaceport in Europe.
It is one of several space centres sprouting up around the continent amid a surge in popularity of small rockets and the commercialisation of space.
SaxaVord received permission from UK aviation regulators in December 2023 to begin orbital launches this year. It is allowed up to 30 annually to take satellites and other payload.
The first attempt to launch satellites from UK soil failed in January last year when a rocket failed to enter orbit after discharging from a Virgin Orbit Boeing 747.
The attempt took place at Cornwall Spaceport in southwest England, where rockets are carried by aircraft and launch horizontally.
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