Gamers develop their agents over time in the online game, so many feared they had lost weeks of progress.
The problem appears to have affected only people using the Xbox One version of the title.
The publisher, Ubisoft, said it would soon restore the missing data.
"The issue was caused by a malfunctioning server that couldn't synchronise character data correctly and corrupted them instead," Ubisoft told the BBC.
"The game client was unable to read this corrupted data, and simply assumed that the character didn't exist.
"Once this has been identified, we were able to restore the server to its normal functions, thus ensuring that the issue will no longer occur for other players.
"For those who experienced the issue, your character is not gone.
"We are currently working on a fix that should make it available shortly.
"Implementing this fix will require a server downtime, and we will let you know when we are ready to perform it."
The Division sold more copies in its first day than any other Ubisoft title to date - including Assassin's Creed and Watch Dogs.
It went on to spend four weeks at the number one spot in the GfK Entertainment All Formats video game charts, following its release on 8 March.
The story takes place in New York after the smallpox virus has been spread via infected banknotes.
The player assumes the role of a Division agent - a secretive organisation tasked with bringing order to the chaos that has engulfed Manhattan
"If you've spent 30 or 50 or 100 hours building up your progress, you're going to be quite upset when it magically disappears," said Keza MacDonald, editor of the games news site Kotaku UK.
"Similar things have happened before - for instance, when Grand Theft Auto Online was released, for the first several weeks, characters would just disappear.
"People are generally understanding of there being launch issues with online games and there can be an element of forgiveness, but the Division has been out for over a month now and people are going to have expected better."
The Division had had a relatively smooth start, after experiencing some server issues in its early hours.
The 1.1 update was released on Tuesday to make the title "more satisfying".
Changes included ensuring players would be given a "high-end" reward when they killed a challenging computer-controlled enemy.
But it soon became apparent there was a problem.
"Wow, I really love this game, but this is too much - I lost my character,  and I'm not going to do a new one... bye The Division," tweeted Pedro Morales.
Another player, nicknamed Freak5how, wrote: "If they do not get characters restored, I am going back to Destiny" - a reference to Activision's rival online shooter.
One analyst said the fault highlighted the risks of a wider shift to making games dependent on remote computer servers.
"In the past, if you lost your character save and your console wasn't connected to the net, then you didn't really have anyone to blame," said Piers Harding-Rolls, from the IHS consultancy.
"But in today's context, you've got your information being stored by a company, so it's out of your control.
"And when it affects lots of people it becomes a big problem for the firm involved."
Ms MacDonald said a lot was now riding on Ubisoft resolving the issue as quickly as promised.
"If it takes a couple of days to sort out, you might forgive them," she said.
"But if it takes two weeks or longer to get the characters back - or they never return - you're probably not going to be inclined to play anymore.
"So, speed is really important when it comes to fixing problems like this."
Ubisoft has promised to fix a fault with its blockbuster video game Tom Clancy's The Division that caused hundreds of players' characters to vanish.