However, a planned pipeline from Clyde to Alexandra for the Lake Dunstan Water Supply Project was still expected to proceed, although a new filtration system would now be needed, the cost of which was unknown, Ms Muir said.
The presence of the Lindavia algae was announced in a council statement yesterday.
The algae was the species responsible for making lake snow, a glue-like slime that blocked water inlets and water filters, Ms Muir said.
The algae was non-toxic and posed no known human health risk, she said.
"This is the first time the algae has been found in Lake Dunstan," Ms Muir said.
"It has been causing issues for some time by blocking domestic filters in Wanaka and has also been found in Lakes Wakatipu and Coleridge, as well as several North Island locations."
She said the proposed Clyde to Alexandra pipeline was still expected to go ahead, despite the algae discovery, but a new filter system would now be needed. The cost of this was unknown.
The council was liaising with the Queenstown Lakes District Council to "share the costs and trials to identify a solution to the Lindavia challenge", which would affect many water sources across both districts, Ms Muir said.
The findings from current filter trials would also be used to help plan for the proposed Cromwell Water Upgrade, Ms Muir said.
The report about the algae and Lake Dunstan project will be considered by the council's Three Waters Infrastructure Committee at its meeting on May 15.
