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A 73-year-old Austrian engineer last night confessed to holding his daughter captive for almost a quarter of a century, sexually abusing her and fathering seven children with her.

Josef Fritzl confessed 36 hours after he was arrested and as police searched the family`s apartment building in Amstetten, east Austria, where he held his daughter Elisabeth and her children prisoner in three cramped underground rooms.

"He has now said that he locked up his daughter for 24 years and that he alone fathered her seven children and that he locked them up in the cellar," said Franz Polzer, head of the criminal investigations unit in the province of Lower Austria.

Mr Polzer said Fritzl also told investigators that he tossed the the body of one of the seven infants in the incinerator of his apartment building after the child died three days after birth.

Behind a hidden door in the cellar, police discovered a complex of small windowless rooms less than 2m high, where Elisabeth was kept imprisoned with three of her children - her 19-year-daughter, Kerstin, and two sons, aged five and 18.

Three others aged 12 to 16 - Monica, Lisa and a boy - were formally adopted by Fritzl and his wife, Rosemarie, and allowed to attend school. Fritzl had claimed for years they were dumped on him with a note from his missing daughter saying she was unable to care for them.

Elisabeth, 42, effectively disappeared in 1984 and no passport, driver`s licence or other official document has been issued in her name since.

She was drugged and handcuffed by her father soon after her 19th birthday and locked in the basement of their three-storey home. She had been sexually abused since the age of 11.

It was assumed Elisabeth had left voluntarily when her parents received a letter from her saying they should not search for her.

Locals said they were shocked to learn of what has been dubbed in Europe as "The House of Horrors".

"The family never attracted attention. We still can`t believe what happened," Mathilde Streukellner, a pensioner who lives a few blocks from the home of Josef Fritzl and his family, said.

Hildegarde Huber said she had visited the house after the Fritzls put out a notice for an apartment to let.

"The house seemed to be well-maintained but we didn`t take the flat in the end because it was too dark and the furniture didn`t fit."

Huber also said: "I haven`t dared tell my daughter, who is currently abroad, what she may have escaped."

London newspaper The Times reported that the basement was connected to the apartment by a hidden door and protected by an elaborate electrical locking mechanism to which only Fritzl knew the code.

The basement rooms contained sanitary facilities and cooking equipment, police said, and one was described as a padded cell.

"Everything is very, very narrow and the victim herself, the mother of these six or seven children, told us that this was being continually enlarged over the years," Mr Polzer said.

Elisabeth was "greatly disturbed" and agreed to talk only after receiving assurances her children would be cared for and that she would no longer have to see her father.

Police psychologists are caring for Elisabeth and her six surviving children. A spokesman said that when the two boys emerged from the basement on Sunday, they "saw the daylight for the first time in their lives".

Police found out about Elisabeth when Kerstin became ill and Fritzl took her to hospital eight days ago.

When doctors could not determine the cause of her illness, they called police for help to find the mother so she could provide a medical history.

Fritzl then freed Elisabeth and her remaining two children from the basement, telling his wife their "missing" daughter had chosen to return.

All three children in the dungeon were fed and clothed by Fritzl, but were not allowed to go to school. Elisabeth had to teach all three to speak, read and write, The Times reported.

The case has echoes of the Natascha Kampusch affair in which a Viennese schoolgirl was kept in a cellar from the age of 10 for eight years before escaping.

It is likely to fuel a furious debate in Austria about how easy it is to slip through the welfare net.

Newspaper editorials across the country questioned authorities and residents of Amstetten for failing to notice "the martyrdom in the horror house" under their feet.

"This is a shock to all of us," a neighbour, who gave her name only as Maria, 66, said.

"I`m good friends with Mrs Fritzl. Both she and her husband are lovely people ... they are well dressed, polite and very nice.

"We always believed that the mother of the children had run away and dumped them on the grandparents. Who would ever think of such a horrible thing?"

As well as Elisabeth, Fritzl had four children, all of whom have families of their own.

Police said the dungeon was taboo for the rest of the family, including his wife, who claimed to have known nothing about her daughter`s fate.

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