Blue-green algae has been detected in Fitzroy Falls Reservoir.
WaterNSW issued a red alert level warning for the reservoir after the water was tested last week.
Fitzroy Falls Reservoir isn't used for drinking water and swimming isn't allowed.
The waterbody is primarily used for recreational activities such as boating.
WaterNSW said the picnic area remained open and "picnic area water supplies remain unaffected and safe to drink".
Freshwater blue-green algal blooms can be recognised by a discolouration of the water, by scum on the water surface or by an earthy or musty odour coming from the water.
However, algae that are toxic can only be positively identified by an expert.
According to the WaterNSW website, red alert levels represent 'bloom' conditions.
"The water may appear green and may have strong, musty or organically polluted odours," the website said.
"Blue-green algae may be visible as clumps or as scums.
"The 'blooms' should be considered to be toxic to humans and animals, and the water should not be used for drinking (without prior treatment), stock watering, or for recreation."
According to WaterNSW, the water at Fitzroy Falls Reservoir was last sampled on Tuesday, July 7.