It was not clear why the radioactive source had been kept in the factory in Grozny, but officials said it posed a severe threat to anyone who came near it. Site contamination was found to be tens of thousands of times more than normal levels.
Valery Kuznetsov, a Chechen prosecutor, told NTV television: "This is above all now a threat to the population, because the leadership and officials of the firm did not take the necessary steps to isolate the isotope."
Almost all of Grozny was destroyed by Russian bombing in 1999-2000 when Russian troops poured back into the region to reassert central control over separatist rebels, who still attack troops and police every day.
Once a mighty industrial centre, Grozny's factories are now derelict, many of them dotted with machinegun nests.
Other Chechen officials did not wish to comment on the presence of the radioactive material, which was named by the prosecutors as Cobalt-60, an isotope of cobalt used as a source of radiation in food processing, hospitals and elsewhere. Cobalt-60 has also been identified as one of the most likely elements to be used to make a "dirty bomb".
Prosecutors said it had raised radiation levels to 58,000 times above normal.
A member of Chechnya's emergencies committee, who asked not to be named, said: "This is not a one-day problem. This problem of radiation leaking into Grozny's air has been going on for a decade." He said looters had uncovered the materials.