People in the Northland town of Kaeo have been told to boil their water if they are on town supply because otherwise it is unsafe to drink.
The small town's local supply comes from a bore, and residents who use it have been complaining for some time about its brown colour and smell.
Northland Health said it had been working with the trust which runs the water scheme and hoped to find a solution to the problem soon, but in the meantime had served Kaeo with a 'boil water' notice.
The Far North town on State Highway 1, north of Kerikeri, has a population of just under 500 and many households have installed tanks to collect rainwater rather than rely on the town supply, which has been problematic for years.
In 2000, the Far North council gave Kaeo's water supply to a private company - which went broke. After community meetings a local trust, Wai Care, offered to take over.
Wai Care spokesman Bryce Smith said it had relied on advice from Northland Health and received funding from the Ministry of Health to upgrade the system.
"The new plant that was installed, that was a recommendation from the Ministry. And that company [which installed it] went bankrupt before the completion of the installation."
Mr Smith said the water was fine when it left the treatment plant, and the old plumbing in the town was responsible for the brown colour and turbidity.
Local businesswoman Helen Owens said she and her husband always warned off tourists who arrive in Kaeo and went to fill their water bottles from public taps - such as the one at her garage.
"We advise them to buy water or keep going until their next stop where there's tank water," she said.
Mrs Owens said when she and her husband John bought Kaeo Farm and Fuel 10 years ago they were going to install a water fountain for customers, and even plumbed in the pipes.
But when they saw what came out of them they changed their minds.
"Cyclists and backpackers, especially, they go to fill up from the outside taps and we advise them against it because of the colour and the smell and the unknown quality of it."
Anna Valentine owns a house on Kaeo's main street and said she had had nothing but trouble with the water since she moved in two years ago.
She said she was assured the water was fine apart from high manganese levels.
But when Wai Care tried to charge her an initial connection fee of $2000 she refused because the water was full of silt and undrinkable.
"I hate having to bathe the children in brown water, and I hate seeing the washing come out of the machine stained brown."
Mrs Valentine said council staff who meet at the library next door were so unimpressed by the tap water, they had a roof tank installed, to collect rainwater for their tea. However, she could not afford to do that.
A Northland Health spokesperson said the water from the Wai Care system must be boiled before drinking because of what it called failing processes at the treatment plant.