The Department of the Marine has this week confirmed that a significant number of fish are decomposing at the bottom of Inver Bay, Co Donegal.
One Donegal environmentalist has warned the situation will cause "major problems" in the area.
Divers from the Department investigated claims of dead salmon lying on the bottom of the bay, which is home to three salmon farms. A spokesman said a "significant number" of dead fish were discovered "under and adjacent to a cage of one of the farms".
A report is being compiled but the spokesman said the Department of the Marine was extremely concerned about the consequences for fish health in the bay.
"We have asked the company in question to put together a report on the incident as a matter of urgency and to tell us what plans they have to rectify the matter," he said.
The Department would continue to monitor the situation and would be carrying out an audit of fish health on all the farms in the bay. It was "not happy" about the incident and was concerned about the possible effects.
Mr Taidgh Gallagher, the director of Ocean Farm salmon-growers in the bay, confirmed there had been a fish kill on the farm at the beginning of June. He said a clean-up operation was carried out but conceded "some of the moralities" may have been missed.
Mr Gallagher said the company had suffered a fish kill as a result of heavy weather and strong currents which had led to fish being suffocated in one of the cages. "There must have been a spillage from the net," he said. He referred to the fish kill as "an unfortunate technical accident".
He would be awaiting the outcome of the Department's report into the incident.
Mr Gallagher said his laboratory technicians at Ocean Farm would continue to monitor water quality in the bay daily. "At present there is no indication that fish health has been affected," he said.
Earlier in the week a spokesman for the Lough Swilly Preservation Group, which is opposed to large-scale salmon farm development, said such a kill would cause "an awful lot of damage in the area".
Mr Jerome Keeney said: "We could be facing an unbelievable disaster and a major environmental problem over the coming weeks. The water quality in Inver Bay will deteriorate significantly unless something is done immediately."
Mr Richie Flynn, of the Irish Salmon Growers' Association, said he understood the amount of fish concerned was "less than an average herring trawl".
There was absolutely no disease issue in this case.
"The facts are fish were killed during normal harvesting operations; unfortunately it was during storm conditions and an amount of fish suffocated because a net washed over them.
"There was a danger that some of these could have escaped and it was the company that made a quick decision to save these or continue harvesting. They decided to prevent any live escapees," Mr Flynn said.
Mr Jim Kennedy, a local man who is part of a partnership hoping to set up a fish farm in Inver Bay, said he believed the fish kill would damage the industry in the bay.
He said the news of this fish kill was a cause of grave concern for him and he would now have to consider how long it would take for the water quality in the bay to return to normal before he started any possible operation.
"In my opinion, there has to be serious consequences of something like this. If it is significant enough, it is bound to effect the other farms in the bay," he said.
Inver Bay is licensed to farm approximately 3,000 tonnes of salmon. On average each individual salmon weighs 4 kg.