Excavations have recently been made at two sites in the fault system, at the base of the Rock and Pillar Range, about midway between Hyde and Middlemarch, and work on site continued last week.
Seismologist Prof Mark Stirling, who leads the University of Otago geology department team, said that the Hyde fault could generate a quake of more than magnitude 7, which could have damaging effects in the city, and "there's no two ways about it".
He did not believe in "sugar-coating" the potential outcome for parts of the city, but much more work had to be done to clarify matters further.
Australian researcher Jonathan Griffin has been funded by Geoscience Australia to undertake PhD research with Prof Stirling, including on the Hyde Fault.
Researchers were starting "a multi-year study" to address a key research question: "Where will the next major earthquakes strike in Otago and Southland?".
Researchers would initially study an area within 100km of Dunedin, and first studied was the Hyde Fault, "the closest major unstudied active fault to the city", Prof Stirling said.
The project, to investigate the potential for earthquakes to occur in what are considered "low seismicity" areas, had gained $68,000 from the Earthquake Commission and funds from Otago University.
Otago had "quiet" but important faults, which could contribute to earthquakes that might occur over periods of thousands or tens of thousands of years.
However, such quakes could be "quite damaging", Prof Stirling said recently.
"And Dunedin, with its beautiful old buildings and unreinforced masonry, could be more at risk than Dunedinites think."
The 2010-12 Canterbury earthquake sequence showed how low seismicity areas could produce large earthquakes "out of the blue".
