"Whilst this dam does not supply the water filtration plant directly, this part of the system has been disconnected from supply while further investigations are conducted," WaterNSW said in a statement.

PFAS compounds encompass more than 14,000 chemicals that do not break down and can accumulate toxins in plants and animals, earning them the nickname "forever chemicals".

As studies on the compounds emerge, overseas governments in New Zealand and the US have taken action to gradually ban or phase out their use.

Tests on July 31 and August 16 in Medlow Dam both showed combined levels for two groups of PFAS substances were above 0.094 milligrams per litre.

Downstream of Medlow, Greaves Creek Dam recorded about 0.058 micrograms per litre, while the Upper Cascade Dam had levels as high as 0.037 micrograms per litre.

Australian standards limit levels of those chemical groups to 0.07 micrograms per litre.

Testing of all Sydney drinking water supplies in June found the chemicals at six sites, including the city's main reservoir of Warragamba Dam.

The highest levels were in samples taken from Blue Mountains drinking water, although each test returned results within Australian guidelines.

Increasing concern about the chemicals has triggered a federal inquiry into their impact on the environment, economy and people's health.

Almost everyone will have some exposure to the chemicals in their lifetime and it is believed all humans have some level of the compounds in their blood.

There is limited evidence about the impact of the synthetic substances on human health but studies have found links between PFAS and some cancers, reduced kidney function, lower birth weight in babies, increased cholesterol and other symptoms.

The US tightened its standards in April, claiming doing so would save tens of thousands of lives over decades.

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