The melamine scare has so far been linked to the deaths of at least four babies, and illnesses in more than 6,000 other infants.
Officials had said earlier said liquid milk was safe, but on Friday the government's quality watchdog said milk sold in liquid form by leading Chinese dairies has also been found to be contaminated with melamine.
Ice-cream and yoghurt had also been found to contain the toxin.
Chinese authorities say melamine was put into the milk powder to make it appear the product had more protein.
The chemical, normally used to make plastics and glues, is rich in nitrogen, an element often used to measure protein levels, and so can be used to disguise diluted milk.
It is being blamed for causing kidney stones in the affected babies, a condition that is rare in infants but which causes a range of health risks.
The government's General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) said tests showed nearly 10 per cent of samples taken from Mengniu Dairy Group and Yili Industrial Group - China's two largest dairy companies - contained melamine.
In Hong Kong, the authorities ordered a recall after China-made dairy products sold there were found to contain the toxin.
Al Jazeera's Laura Kyle, reporting from Beijing, said the scale of the scandal and fallout could be far wider than initially thought, with possibly tens of thousands of people affected.
Coffee chain Starbucks has already pulled milk supplied by Mengniu from its more than 300 cafes in mainland China.
The government's quality watchdog stressed that most milk was safe to drink, citing experts as saying that melamine-tainted milk would not make adults sick unless they drank more than two litres a day.
But it also said companies should take the initiative in recalling tainted products and expected them to implement far more rigorous safety checks.
"AQSIQ will strictly find out the reason for adding the melamine and severely punish those who are responsible," it said on its website, adding that all the batches that tested positive were being recalled.