Federation Council held a community meeting in the town this week to work on a longer term solution to the town's water supply which has been previously described as being so bad people can't use it to clean their teeth or shower.

Many residents have their own water tanks, but supplies are running dangerously low with recent spring rains being at levels experienced at the height of millennium drought of the early 2000s.

Balldale has an untreated bore supply scheme.

"People have been very tolerant to date, but with the current dry conditions tank water is getting very low in a lot of cases," Balldale resident and Federation councillor Fred Longmire said.

"An upgrade of the town supply has been on the agenda for a long time and something must happen because the bore water is of such a poor standard."

The upgrade of the small town's water supply has been estimated to cost more than $1 million.

It missed out on a share of the federal government's $1 millon drought support package.

Mayor Pat Bourke acknowledged the town's concerns about its water.

He said the state government had previously undertaken a feasibility study for provision of a treated water supply and provided six options for consideration.

"Further investigation has occurred in relation to one of the options, which recommended finding an alternative local source of groundwater other than the current bore, which meets all water quantity and quality requirements, disinfecting it with UV or chlorination, and then pumping it to Balldale," Cr Bourke said.

"A test bore has been drilled which has shown promising results.

"Once further analysis of that is completed, a strategy will be developed based on what results are the most feasible and acceptable to the community.

"This will include implementation and budget considerations and of course looking for funding assistance from state and or federal governments."