The council yesterday issued a boil water notice covering a swath of the central city and north end after millions of litres of untreated ''raw'' water from the Ross Creek Reservoir entered the city's drinking supply.
Council staff had begun draining the reservoir on Monday, unaware an old pipe below the dam, which was thought to be disconnected, was still linked to the city's reticulated network.
Council chief executive Dr Sue Bidrose said the level of contamination in the raw water was not known, but would be confirmed by test results expected later today.
The raw water was stored at the reservoir for an extended period, as a back-up supply for the city, but it was not treated or tested, she said.
''It's not for drinking, so there is a health risk.
''We don't know the level of risk because, simply put, we weren't testing this water because it wasn't supposed to be drunk.''
The council and Dunedin Hospital both responded to yesterday's alarm by activating their emergency operations centres.
The hospital did so in anticipation of a spike in cases of gastroenteritis, including vomiting or diarrhoea, but was yet to see any noticeable increase in cases.
The council had asked to be informed of any rise in cases, but had also rushed through water tests to confirm the level of contamination, Dr Bidrose said.
It was hoped any contamination would be diluted by the network's treated water and that anyone noticing discoloured water would not have drunk it, but it was too soon to say.
The boil water notice would remain in force until at least Friday afternoon, meaning days of disruption ahead for thousands of residents and business owners.
The notice covered 1721 residential properties and 826 commercial properties across the CBD and North Dunedin, Leith Valley, Woodhaugh and all central city areas between the Town Belt and the harbour.
Water tankers were dispatched to supply Dunedin Hospital, George St Normal School and Logan Park High School, as well as cafes and other businesses in the Octagon and elsewhere dealing with the disruption.
People in affected areas were advised to run taps for up to 15 minutes to clear their pipes and tanks, and discard stored water and items, such as lettuce, washed in raw water.
Dr Bidrose defended the staff involved in Monday's mishap, but promised a full investigation and public accountability.
''We will make it really clear what went wrong,'' she said.
The first signs of trouble emerged on Monday afternoon after staff opened a valve to drain water from the reservoir, as part of ongoing refurbishment work in the area.
The council's plans showed an old pipe below the dam, once connected to the city's reticulated supply, had been deactivated 30 years earlier.
Unfortunately, it was still connected, and funnelled the raw water back into the city's drinking network, she said.
Council infrastructure and networks general manager Ruth Stokes said the council had moved ''very fast'' to contain the situation.
The first two complaints of water discolouration emerged about 3.30pm on Monday, but were initially attributed to ageing and deteriorating cast iron pipes in the area.
It was not until 9.30am yesterday, when a further small spike in complaints came in, that the extent of the problem was confirmed, she said.
The dam's valve was closed by 10am and, minutes later, the city's boil water notice was issued, but by then millions of litres of potentially contaminated water had been released.
Asked if the council could have acted sooner, Mrs Stokes said the response would be reviewed, but the first two complaints of discolouration from an area with cast iron pipes was ''fairly normal''.
Despite that, Dr Bidrose said last year's experiences in Havelock North, where 5500 fell ill after drinking tap water laced with campylobacter, had also underscored the need to act quickly once problems were confirmed.
