The group had driven from the township on Tuesday to admire and photograph the Chasm waterfall after days of heavy rainfall, when the slip fell from a steep face of Mt Underwood about 3.30pm.
The party was trapped between the slip and the avalanche zone barriers across the highway, which were closed and locked, due to earlier severe conditions.
"The weather was so horrific and it was getting dark. No-one could get to them by road or air," Milford Sound Lodge manager Richard Sands said.
"One of them works for the underwater observatory so we stayed in VHF radio contact until morning, by which time the rescue helicopter could get in."
The group had used sleeping bags and blankets and stayed in their vehicles.
Rescuers found only two villagers the next morning - five decided to walk over the slip once daylight broke.
New Zealand Transport Authority (NZTA) staff flew in and Mr Sands drove them to the slip site at about 7am yesterday.
He said they saw five "wet, muddy and bedraggled figures" make their way over the landslip.
"They're really good, as it turned out. They're incredibly happy to be alive and in good spirits - a little bit reflective on what might have been."
Milford Sound was expected to be cut off to road traffic until Sunday after mud, broken trees, branches and rocks fell on the highway about 6km to 7km from Milford Sound.
NZTA regional network manager for Otago-Southland Murray Clarke said 170mm of rain had fallen, including 80mm of intense rain within two hours, the day before.
It saturated the thin layer of soil on a steep face of Mt Underwood.
Surface vegetation and rocks "peeled off from the rock underneath and rolled down like a big carpet.
"There were a couple of walkers who did see and hear it. They were fortunate they weren't right there when it came down."
Mr Clarke said it was probably the walkers who raised the alarm.
NZTA contractors Downer EDI Works assessed the slip on the night and staff were back along with a helicopter at daybreak yesterday.
Diggers and trucks were used from 10am at both ends of the slip and the priority was to open one lane to traffic before the end of the weekend.
It was expected to take another four days to clear and tidy the area.
Destination Fiordland manager Lisa Sadler said about 50 staff were stranded in Milford Sound village, a minimum contingent due to the low tourist season.
About 20 travellers and employees had left the day before the slip.
Staff could fly out if they needed to leave before the highway lane was available, she said.
