Several Wallace St residents awoke at 2.30am to the sound of the small digger being driven through a nearby playground.
The machine, which was parked on the roadside, was driven 20m and used to damage low-hanging branches and a park bench, before coming to a halt by some swings.
Senior Sergeant Craig Brown, of Dunedin, said three or four people were believed to be involved in the incident.
Keys for the digger had been left in the ignition and police had yet to talk to the owner.
A badge stolen from a nearby Porsche was found near the scene.
The two incidents are believed to be related.
Dunedin police are appealing for information.