The man, believed to be Michael John Hodges (35), from the Tainui area, died while diving near Gull Rocks, which are off the coast on the eastern side of Sandfly Bay, on Friday evening.
He is understood to have departed from Tomahawk with a group of fellow divers on board an inflatable boat and was seen surfacing, but then sank back under the waves.
The alarm was raised by one of the group and an initial search was launched just before 7pm.
The police national dive squad joined the search for him on Saturday after the initial search was unsuccessful. A police spokeswoman said the divers saw a body shortly after entering the water, sometime after 1pm, and his body was recovered just before 4pm.
"While the formal identification process is yet to identify the body, it is thought to be connected to the search for the missing diver from yesterday afternoon," police said in a statement on Saturday afternoon.
The diver’s next of kin had been advised and the matter was being referred to the coroner.
The dive squad arrived in Dunedin on Saturday morning and departed from Portobello about 1pm with the Coastguard to conduct their search.
Coastguard onshore co-ordinator Lox Kellas said the initial search included the use of a helicopter which checked the area from Sandfly Bay to Cape Saunders.
The search was suspended at 9.45pm and the man’s next of kin had been advised he was missing and were being offered support.
Mr Kellas said the area could be a "notorious piece of water" when the conditions were not right, with numerous drownings up and down that piece of coastline.
However, there was nothing to suggest conditions were bad on Friday night.
The search was helped by good conditions on Saturday.
Otago Freediving Club secretary Svend Tolson said everyone in the diving community was shocked.He did not know if the diver was a club member.
