Up to 15,000 litres of diesel is leaking into a stream in the Tongariro National Park that feeds into the Raetihi town water supply.
The Ruapehu District Council has closed Raetihi's water supply and is supplying water to residents from tankers parked on Seddon Street.
The Department of Conservation has traced the diesel to a tank from the Ruapehu Alpine Lifts at the base of Turoa ski field.
Council's deputy mayor Don Cameron says the DoC has traced what appears to have been a slow leak from the Turoa ski field.
Mr Cameron says it's a serious ongoing leak with possibly up to 15,000 litres going into the Makotuku stream.
He says Raetihi's town water supply has been shut off indefinitely, affecting more than 1000 residents as well as nearby farms.
Mr Cameron says he can still see traces of diesel in the stream and nothing can be done to clean pipes until the water is clear.
He says the leak was first detected on Sunday after a smell of diesel was reported.