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KiwiRail reported the leak at 6.10am and initially said the leak was on a truck on the Interislander ferry Kaiarahi.
It later said the leak was at a railway yard near the ferry terminal and the area had been evacuated.
Fire and Emergency has confirmed the leak of highly flammable LPG from a 25,000-litre tank.
It has two crews from Picton in breathing apparatus, spraying water on the tank to contain the leak and minimise the risks of explosion.
Two more crews from Blenheim are on the way, as well as the Nelson hazardous materials unit. Police were also assisting.
KiwiRail chief operating officer Todd Moyle said the tanker was venting through a valve, as it was designed to do when there was some sort of fault.
"We've implemented our standard procedures of isolating the site and putting an 800m cordon in place ... while we're those getting technicians to site to fix the fault."
There was a very limited risk of explosion, he told Morning Report.
The ferry Kaiarahi, which was due to arrive in Picton at 7am, was being slowed down, and Bluebridge ferries may also be affected, Moyle said.
NZTA said SH1 was closed between London Quay and Dublin Street and advised motorists to take care in the area.