The Blue Lake is a valued water resource for the City of Mt Gambier and there is increasing community concern regarding its longer term sustainable use. The lake is groundwater fed and there is known contamination of the unconfined aquifer in the vicinity of the lake. Groundwater flow into the Blue Lake is predominantately from the unconfined aquifer via an upper bryozoal sub-aquifer, a lower dolomite sub-aquifer and karstic features developed within the limestone. Some groundwater inflow is also derived from a deeper confined aquifer. It has not been possible to quantify the various groundwater inflow components due to a general lack of detailed hydraulic data. A groundwater capture zone for the Blue Lake has been defined and this should be used to develop appropriate management policies to safeguard the water quality of the lake. Stormwater discharge to the unconfined aquifer via naturally occurring karstic features and drainage wells in the Mount Gambier city area is likely to have resulted in some improvement in the lakes water quality. A local decline in groundwater levels is most likely a result of the extraction of water from the Blue Lake and it is possible that the pumping rate has approached the volume of groundwater inflow into the lake. Additional investigations to quantify the components of the water budget for the Blue Lake are recommended.