The main burst just after 2pm and about an hour later the footpath collapsed and took out a wastewater pipe, causing an unknown quantity of wastewater to enter the lake.
Residents have been told not to flush their toilets and are being warned to stay out of the water.
Chief executive of Taupō District Council Gareth Green said contractors would make a temporary repair to the wastewater pipe but it could take a couple of hours before the repair was completed.
"We urgently need Taupō residents to refrain from flushing and putting water into the wastewater system until further notice," he said.
He told 1 News 70 er cent of Taupō's wastewater was now pouring straight into the lake.
"The team have done everything they can, now we are into recovery and clean-up, which will take several weeks."
Lake Terrace between Ruapehu St and Ferry Rd is currently closed while an assessment is undertaken.
The pipe was one that went under the bridge to Nukuhau, with affected residents reporting no water and low pressure.
The council is advising people to avoid flushing toilets and taking showers, and advising against any other unnecessary water usage.
Waka Ama paddlers have also been advised to stay out of the lake until further notice.
Updates will be provided on the council Facebook page.
