Auckland tourist Georgia Rose first spotted the bright green liquid pouring out of one of the town's stormwater drains about 3pm today.
The council was unaware of the situation when contacted by the Herald earlier this afternoon.
A spokeswoman later said council contractors had located the source of the substance and had taken samples for testing.
The substance was traced back to Horne Creek near the stone bridge in Templeton Way.
Shocked by what she saw, Rose said the water was going directly into Lake Wakatipu and slowly spreading across the beach and about 5m out into the lake.
The unusual sight had also drawn the curiosity of a large number of tourists who had gathered around the lake edge to capture what was going on.
"It's flocked hundreds of tourists to this end of the beach to take videos. There's quite a crowd."
The water was pouring out of a pipe near the children's playground by Queenstown Gardens, she said.
Curious as to why the water was green, she said they followed a stream back through the gardens to try to work out where it was coming from. That's when they spotted the drain.
"It's right on the lakefront at Lake Wakatipu.
"It's coming from the same body of water. We kind of followed it and it's coming through the stormwater drains, from the centre of the city, and it's just pouring into the lake right now.
"It's gone green, quite far down the beach."
Rose said the water seemed to be changing all of the water colour and wasn't sitting on top.
She hadn't touched the water but said she hadn't noticed a peculiar smell.
"I haven't touched it actually because I wasn't sure what it was. I haven't noticed any smell, I'm not sure what it is."
