The Kangleyuan home in Henan province was built with flammable material and had poorly designed fire escape routes, said the national work safety agency.
The fire on Monday night killed 38 and injured another six people.
The case has revived public concern in China about building safety and construction standards.
The State Administration for Work Safety said that initial investigations showed that the home "did not meet standards" in multiple areas.
It said it was constructed with steel boards stuffed with flammable material, fire escape routes were narrow, and fire and electrical safety management had "irregularities".
It added that the incident showed that local authorities' checks had failed and regulatory measures were inadequate.
The Southern Weekly newspaper quoted locals as saying such construction was common in the area, and called them "steel foam homes" as the buildings were often padded out with cheap foam for insulation.
Local media have run pictures showing insurance companies that set up booths at the site, with female marketing agents handing out brochures and canvassing for customers. Reports said the companies were also offering to help facilitate claims for families of the victims.
Meanwhile the top prosecution body in China, the Supreme People's Procuratorate, announced it would be joining local officials in the investigation.
It will be paying special attention to crimes including dereliction of duty, power abuse and self-seeking malpractice, according to Xinhua news agency.
At least 12 people have been detained in connection with the fire, including the home's legal representative.
President Xi Jinping had earlier this week ordered "all-out efforts" to care for the injured and bereaved relatives and to find out what had gone wrong.
A Chinese nursing home destroyed by a deadly fire was poorly constructed and top-level prosecutors have been sent to investigate, authorities say.