Reed (71) died in New York late on Sunday (NZ time), reportedly of an illness related to a liver transplant he had earlier this year.
The former lead singer of Velvet Underground (he quit the band in 1970) was regarded as one of the most influential and distinctive musicians of his generation.
Dunedin musicians who established the Dunedin Sound were among many young artists worldwide who took inspiration from Reed's punk-rock.
Music writer and retailer Roy Colbert, who owned Records Records for 35 years, said Velvet Underground's Pale Blue Eyes (1969) was ''about as perfect as you can get'', and Venus in Furs (1967) another gem.
Having spent yesterday listening to Velvet Underground, following news of Reed's death, Mr Colbert said the band's ''lovely simple guitar backings'' were a key influence on the Dunedin Sound, because young musicians were able to replicate it.
''It's very simple, starting-out guitar, and that's very much the Dunedin Sound to me.
"Rick Bryant once told me he always thought Velvet Underground was a mixture of the Rolling Stones and Bob Dylan, which is kind of like the essence of rock, really, and the Dunedin Sound, for me, was the essence of rock, as well.''
Velvet Underground's ''drone'' was also heavily used by Flying Nun Records' Dunedin artists in the early 1980s, Mr Colbert said.
The band's music would continue to be influential, and would serve as Reed's legacy.
''That first album came out in 1967 but in terms of influence it peaked in the '80s and '90s. A lot of music comes and goes very quickly but Velvet Underground took forever and will be forever. It will never go away.''
Graeme Downes, founding member of the Verlaines and head of Otago University's music department, said Reed and Velvet Underground made a ''significant'' impression on the Dunedin Sound.
''I'm gutted,'' he said of Reed's death.
Dr Downes said Reed's live album Rock 'n' Roll Animal, which was released in 1974 and included Velvet Underground songs, was especially memorable.
The Dunedin Sound was complex and influenced by many things, as was the music by Reed and Velvet Underground, he said.
''I would say exactly what Lou Reed said when he was associated with punk. He said, `I can't be, because I'm far too literate for that', and that's what the Dunedin Sound was, as well.''
An obituary will follow.
