Early reports suggest the mushroom cloud was caused by a Ukrainian army attack on an ammunitions depot of the rebel Donetsk People’s Republic.
Ukrainian MP Borys Filatov praised the army for hitting a target, but said "they don't know what they hit".
Local militia claim the target was a military chemical plant called DKZHI, but many onlookers thought the blast to be nuclear.
"The epicenter of the blast was near DKZHI," co-chairman of the anti-Kiev People’s Front Konstantin Dolgov said on his Facebook page.
Dr Douglas McGregor, a researcher in Nuclear Physics at the University of Glasgow, told the Huffington Post: "To my mind the videos show a large explosion, which is most likely to be a very large conventional explosion.
"However, from the pictures I could not categorically rule out a small nuclear explosion. The acid test will be to monitor to see if there is any radioactivity in the vicinity when observers gain access to the site."
The blast was heard for miles and shattered windows across Donetsk.
Donetsk, Luhansk and Crimea highlighted on a map of Ukraine
The close proximity of the resulting fire to DKZHI posed a threat of chemical spill, although local press are reporting no immediate risk.
Right-wing nationalist MP Dmitry Yarosh said the explosion was a targeted artillery strike on rebel supply trucks carrying GRAD missiles, and GRAD launchers, killing "nearly 200 terrorists".
The city of Donetsk is currently held by Russian-back separatists and has been targeted by Ukrainian forces several times during the ongoing conflict.
The Moscow-supporting rebels declared Donetsk and Luhansk independent from Ukraine in May 2014 following independence referendums, but this is unrecognised by the Ukrainian government and Western powers.