Four fishermen were rescued at sunrise after their boat caught fire and began taking on water near Knight's Point, north of Haast on the West Coast.
By lunchtime, all that was visible of the Greymouth-based Honey Dew was the mast.
There were two-and-a-half tonnes of diesel on board and there are fears it could harm what's been described as one of the world's most pristine coastlines.
A flare from the boat was spotted by hunter Luke Potts near Knights Point at 6.20am. He drove to the Lake Moeraki Wilderness Lodge to report the sighting and lodge owner Gerry McSweeney reported it to emergency services about 10 minutes later.
Dr McSweeney then drove to Knights Point where he spotted the fishing vessel off the coast, and proceeded to alert local fisherman Kerry Eggeling and West Coast search and rescue co-ordinator sergeant Sean Judd.
Mr Judd said the boat had caught fire but didn't know how the fire started.
A fishing boat in the vicinity, the Grace Mary skippered by Nathan Sulman, was on the scene to rescue the crew of the stricken boat.
The Honey Dew is owned by Kelvin Fawcett of Greymouth and the skipper on board at the time of the fire was Ross Coppell.
"The crew are all safe and well, and at present Nathan (Sulman) is taking them back to Jackson Bay on the Grace Mary,'' Mr Fawcett said.
"Things are a little sketchy at this point of time but the boat was inshore trawl fishing at the time of the incident about one and a half miles off Knights Point.''
Mr Fawcett said he had owned the the Honey Dew for 26 years and the boat had undergone its four-yearly survey in November.
"You've got to bear in mind that this is a heavily-built ex-mine sweeper for the English navy so it'd be hard to sink it,'' he said.
Mr Eggeling phoned local fishermen to alert them to the incident and managed to contact the Grace Mary as it attended the sinking ship. He said the fire had knocked out the boat's power, forcing them to send up the flare.
Mr Eggeling said he observed the boat from the Ship Creek lookout and it appeared to be just over 1km south and a bit offshore.
He confirmed the boat had sunk this morning with only the mast visible in about 6 metres of water.
Mr Eggeling expected the Grace Mary would be in Jackson Bay with the rescued crew by about 3pm today.
Dr McSweeney was pleased the fishermen had been rescued.
"It is good that the fishermen have all been rescued and we are happy to have played a small part in helping with that.''
His attention was now turned to making sure that the fuel on board did not contaminate the nearby beach.
"With the boat sinking we are concerned about the diesel that is likely to escape from the vessel and contaminate one of the world's most pristine coastlines.''
West Coast Regional Council Planning and Environment manager Mike Meehan said they would be putting a plane up.
Although the boat had two-and-a-half tonnes of diesel on board, none of it was heavy fuel.
Mr Meehan expected the fuel would break up due to the "high energy'' coastline.