Contractors had inspected the site using a remotely operated underwater vehicle.
The leak was believed to be at the inlet structure, where source water entered the impounded supply.
Two small holes were also found in the cover.
Collis said there was a high possibility the leak at the inlet structure had scoured the underlying material.
This meant it could have created a cavity, which would require repairs to the embankment.
"This is yet to be confirmed and quantified," she said.
While it was good that the source of the leak had been identified, council contractors
still needed to come up with a plan for repairs that would cause minimal disruption to residents.
Collis said the contractors would be on site on Thursday to begin, but how long the repair work would take was not known at this point.
She said once they had a plan and a timeframe, she would better understand the impact to customers.
At present, the town's water supply is drawn directly from the Tamaki River to the treatment plant.
But the town had also been on level-one water restrictions for some time.
While the system of going from source to treatment plant was working well, Collis said she hoped the repairs to the water storage dam would go smoothly.
"Then we'll be wanting rain to fill it, so those water restrictions will stay in place until we've got that back up and running."
The council appreciated that some residents and commercial water users would have concerns.
"We are very thankful to all Dannevirke residents for their efforts in conserving water, and for their patience, understanding and collaboration to help us maintain our water supply."
