Authorities have issued a red (high) alert for blue-green algae for the Abercrombie River Arm upstream of the Wyangala Dam, about 50 kilometres south-east of Cowra.
Wyangala Dam supports irrigation needs of Cowra, Forbes, Condobolin and Hillston.
"It also supplies stock and household needs for landholders and towns along the Lachlan River, environmental flows, flood mitigation and hydroelectricity," according to WaterNSW, which issued the red alert on Tuesday.
The dam is currently operating at 33 per cent capacity.
WaterNSW is advising people to not undertake recreational activities where they may come into direct contact with the water.
"Contact with the water may also pose a threat to livestock and pets," it said in a statement.
"Warning signs are positioned at key recreational areas and will remain in place while high levels of blue-green algae are present.
"The species of blue-green algae identified are potentially toxic and may cause gastroenteritis in humans if consumed and skin and eye irritations after contact. Boiling the water does not remove algal toxins."
WaterNSW issued a similar alert for the Chifley, Windamere and Gosling Creek dams in the Central West in the past three weeks.
WaterNSW said people should not enter the water, drink untreated water or bathe in water drawn from the affected area in the dam.
"Town water supplies remain unaffected and safe to drink," it said.
"Livestock owners are reminded to continue to check stock water supplies for blue-green algae and to remove stock from foreshores where surface scum is visible or blue-green algae are suspected."