Rivers of thick red mud surged down the valleys of the hilly area outside the old colonial city of Mariana.
It engulfed cars and lorries, and destroyed homes.
Authorities in Mariana said the dam had ruptured on Thursday afternoon and sent torrents of mud and debris into the small town of Bento Rodrigues, about 7km (four miles) away.
The BBC`s Julia Dias Carneiro in Rio de Janeiro said the area affected is home to about 500 people.
The rescue operation has been hampered by fears of landslides but helicopters have taken several stranded people to safety, she adds.
Authorities have warned that the water mixed with residue from mining operations could be toxic.
A spokesman for the Samarco mining company, which owns the dam, said the cause of the breach was not yet known.
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