UPDATE: About 300 detainees have escaped and 15 guards have been hurt in explosions in a riot just hours after Kevin Rudd announced a plan to thwart people smugglers.
A security guard, who does not want to be named, told the ABC refugees began rioting late Friday afternoon and within two hours had taken over the centre.
He says they gained access to a kitchen and armed themselves with knives and steel bars. Several new buildings were set on fire and the medical centre has been destroyed.
Around 300 of the 500 detainees escaped and guards were worried about a local fuel store on the island which could be a target.
Saturday morning, the ABC was reporting that police and security guards had restored order.
News Ltd reported on Friday night a Nauruan MP took to state television to call for big, strong men to head to the processing camp as Nauruan riot police were overwhelmed by the the number of rioting asylum seekers.
About 300 Nauruans responded to their leaders' call to confront the protesting Iranians.
Three interpreters and three medical staff were held for an hour before being released but it was unclear if they had been injured.
Freelance photographer Clint Deidenang reported chants of "freedom'' could be heard coming from inside the detention centre from about 6pm.
Mr Deidenang said he heard up to eight explosions before the flood lights outside the detention centre was soon smashed, leaving the area in darkness.
He tweeted: "Massive fire broke out from with the camp. I can see flames and smokes over the tree tops from my position.''
While News Ltd reported the major disturbance may be in response to Mr Rudd's PNG announcement today, the ABC reported that the Refugee Action Coalition's Ian Rintoul says the protest is over the slow processing of claims and has been in the planning for the past few days.
"The tension has built significantly I don't think there should be any surprise about this," Refugee Action Coalition's Ian Rintoul said.
"But as I said the recent arrivals, pushed into circumstances where it's become even more crowded, all the added uncertainty about their delays, every now and then it reaches breaking point.
In November, Amnesty International reported it had found a toxic mix of uncertainty, unlawful detention and inhumane conditions on Nauru.
Following a three-day inspection of the facility, Amnesty International researchers found the facility totally inappropriate and ill-equipped, with 387 men cramped into 5 rows of leaking tents, suffering from physical and mental ailments-creating a climate of anguish as the repressively hot monsoon season begins.
"The situation on Nauru is unacceptable. The unlawful and arbitrary detention of these men in such destitute conditions is cruel, inhuman and degrading," said Amnesty International's Refugee Expert Dr Graham Thom.
"The climate of uncertainty was debilitating with no information being provided to asylum seekers and clear evidence that this temporary holding facility has been erected in haste, with no consideration for the individuals languishing in such squalid conditions.''
Earlier, Prime Minister Kevin Rudd announced asylum seekers who arrive by boat will have no chance of being settled in Australia as refugees.
Asylum seekers will be sent to Papua New Guinea for assessment, and if they are found to be refugees, they will be resettled there.
PNG's prime minister Peter O'Neill joined Mr Rudd in formally unveiling the plan in Brisbane Friday afternoon.
Those found not to be refugees will be sent back to their own nations or a third country.
The hard-line plan was condemned by refugee advocates while Opposition leader Tony Abbott welcomed it, but said it would not work under Mr Rudd.
Kevin Rudd's full statement on the PNG solution
Under the new arrangement signed with Papua New Guinea today - the Regional Settlement Arrangement - unauthorised arrivals will be sent to Papua New Guinea for assessment and if found to be a refugee will be settled there.
Arriving in Australia by boat will no longer mean settlement in Australia. Australians have had enough of seeing people drowning in the waters to our north.
Our country has had enough of people smugglers exploiting asylum seekers and seeing them drown on the high seas.
We are sick of watching our servicemen and women risking their lives in rescues in dangerous conditions on the high seas.
Regional processing arrangements in Papua New Guinea will be significantly expanded and people will be sent to Manus Island as soon as health checks are complete and appropriate accommodation is identified.
PNG officials will assess their claims on Manus Island.
Our governments will expand existing facilities on Manus Island, as well as establishing further facilities in Papua New Guinea.
There is no cap on the number of people who can be transferred to Papua New Guinea.
The Australian government, in partnership with the PNG government, will support settlement services for those with refugee status, as safe and appropriate accommodation and services are identified.
We are a compassionate nation and we will continue to deliver a strong humanitarian program.
If the measure announced today and the international meeting on the convention that has been flagged lead to a significant change in the number of people arriving by boat, then the government stands ready to consider progressively increasing our humanitarian intake towards 27,000 as recommended by the Houston panel.
There is nothing compassionate about criminal operations which see children and families drowning at sea.
Access to our humanitarian program must be through the international organisations which resettle people around the world, not through criminal operators who have pushed people on to unseaworthy vessels with tragic consequences.
The new arrangements will allow Australia to help more people who are genuinely in need and help prevent people smugglers from abusing our system.
The people smugglers themselves are constantly changing the way they operate and we need to be flexible enough to anticipate and match their actions to avoid the terrible consequences of this trade.
No doubt there will be some people smugglers who now encourage asylum seekers to test our resolve.
Be in no doubt. If people are paying thousands and thousands of dollars to a people smuggler they are buying a ticket to a country other than Australia.