Arklow, Co Wicklow, could be without drinkable water for up to three years, according to the acting town clerk of Arklow Urban District Council.
Ms Caroline Fox confirmed that up to €750,000 was needed to repair the town's water filtration system which has been out of order since October 24th.
A new water system, for which funding has been approved, is not due to be installed until 2005.
Ten thousand Arklow residents have been advised to boil all water for consumption, including teeth-washing, although water for general washing remains unaffected.
Meanwhile, at least one local general practitioner has encountered a steep rise in gastro-enteritis and related illnesses.
The problems arose after the UDC's filtration plant at Ballyduff, south Co Wicklow, failed.
The system's floor, which uses sand to filter the water supply, had collapsed, releasing the sand and making filtration impossible. Backwash pumps in the system also failed.
Ms Fox told The Irish Times that "almost irreparable" damage had been done to the system, which would take "between €500,000 to €750,000 to repair" and that this funding was not in the council's current spending budget.
"We will be seeking the funding from the Department of the Environment; this has not been approved yet. If the water treatment unit is not replaced, we will not have a proper water supply for a town of 10,000 people."
The Government has approved an investment of €10.5 million for a new water system for Arklow, but this is not due for completion for up to three years.