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Qantas flight QF32 was travelling from Singapore to Sydney with 459 people on board. It had originated in London.
Pieces of debris believed to be from an aircraft were found on the nearby Indonesian island of Batam.
It is unclear why one of the plane's four engines failed. Qantas has grounded its six-strong A380 fleet.
Qantas said the plane, with 433 passengers and 26 crew on board, experienced an "engine issue" over western Indonesia shortly after taking off from Singapore time at about 1000 (0200 GMT).
"It's a significant engine failure," the chief executive of Qantas, Alan Joyce, said at a news conference.
"We do take our safety reputation and our safety standards unbelievably seriously. And we're not going to take any risks with passenger safety - and as a precaution, we're suspending the flights of the A380 aircraft until we're comfortable that we understand the reasons for this."
No-one was injured. Correspondents at Singapore's Changi airport said smoke billowed from the aircraft, which was surrounded by fire engines.
Engine blackened
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“Start Quote
Everyone was surprisingly calm on the plane. We [were] not going crazy at all”
End Quote Ulf Waschbusch Passenger
Firefighters were seen spraying liquid on the plane.
One of the engines was blackened and its rear casing was missing.
"We heard the boom, I looked outside and saw a little bit of fire," German national Ulf Waschbusch told AFP news agency by telephone after disembarking from the plane along with the 432 other passengers.
"Something ruptured the left wing, it was a small rupture," said the passenger, a technology company executive based in Singapore who was heading to Sydney on holiday.
He said the pilot had then spent two hours dumping fuel in preparation, he said, for an emergency landing.
"Everyone was surprisingly calm on the plane. We [were] not going crazy at all," Mr Waschbusch said.
Map
"The crew helped tremendously. I felt in good hands. Qantas did a great job in keeping us safe."
Witnesses on Batam said they heard an explosion as the plane flew overhead. "There were metal shards coming down from the sky into an industrial area in Batam," eyewitness Noor Kanwa told the AFP agency.
The BBC's Nick Bryant in Sydney says aviation experts have identified the debris as part of a Qantas engine casing, but that the airline has not confirmed this.
Qantas said the grounding of its A380 fleet would be followed by a full investigation.
Qantas had no immediate comment on whether the incident might be related to eruptions of Indonesia's Mount Merapi over the past 10 days - which have prompted some flights above the volcano to be suspended.
Flagship airliner
This incident is a worrying development for an airline which prides itself on an exemplary safety record.
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Airbus A380
Originally posted by SNAFU38
No.
If it was ask more than 1 engine would have suffered.