Taiwan on Tuesday fined a leading supplier more than $1.6 million for selling hundreds of tonnes of "gutter oil" and sparking a food safety scare that gripped the island and spread to Hong Kong and Macau.

The Tw$50 million ($1.67 million) fine was slapped on Chang Guann Co by the the Kaohsiung city government in the south where the company is headquartered.

"Chang Guann is now fined Tw$50 million for having illegally sold poor-quality lard oil," the local government's health bureau said in a statement.

Investigators found that in the six months from February Chang Guann had purchased 243 tonnes of tainted oil -- collected from cookers, fryers and grease traps -- from Kuo Lieh-cheng and mixed it with lard oil for sale to its customers islandwide.

A total of 782 tonnes of such oils had been produced.

Kuo, 32, owns an illegal factory in the southern county of Pingtung at the centre of the scandal. He has been taken into custody.

Five other people implicated in the case have been questioned and released on bail.

Yang Wan-li, spokeswoman for the prosecutors' office at Pingtung district court, told AFP the assets of Kuo and a vice president of Chang Guann had been frozen on charges of violating the food safety law and "their gains from the crimes must be confiscated".

She said another factory -- which allegedly recycled grease from leather processing plants to make oils used in animal feeds -- had bank accounts totalling Tw$7.23 million frozen by prosecutors.

The island was already reeling from a food safety scandal last year.

In the wake of the fresh scare, hundreds of tonnes of mooncakes, pineapple cakes, bread, instant noodles and Chinese steamed buns and dumplings have been removed from shelves. Hundreds of restaurants have apologised to customers for having unknowingly used tainted oil.

More than 1,000 restaurants, bakeries and food plants had used the tainted oil, according to the Food and Drug Administration.

The United Daily News said in an editorial the scandal had damaged the reputation of more than 1,000 establishments and severely tarnished the image of Taiwanese food overseas.

"We're afraid no one is able to estimate how big the losses will be," it said.

Hong Kong authorities said Monday local chains had withdrawn from sale pineapple buns and dumplings feared to have contained gutter oil from Taiwan.

In Macau the city's Food Safety Centre said 21 bakeries and food manufacturers had bought oil from Chang Guann through a local importer.

Last December a Taiwanese factory owner was sentenced to 16 years in prison for selling olive oil adulterated with cheap cottonseed oil and the banned colouring agent copper chlorophyllin.