Barwon Water will construct a new sewer pipe beneath the Anglesea River to replace the damaged main shut down earlier this month.
Engineers have opted to replace the pipe rather than undertake difficult repairs on the key piece of infrastructure, which crosses the river north of the township.
Work will begin within weeks and is scheduled to be completed by Christmas.
General Manager Water Systems Carl Bicknell said a detailed investigation into repair options concluded that the best solution was complete replacement.
"Constructing a new pipe crossing by boring beneath the river bed will better protect this sensitive environmental area and minimise disruption to residents and visitors," Mr Bicknell said.
Services will be maintained by establishing a temporary above-ground bypass from the Coogoorah Park recreation reserve, on the west side of the river, to the corner of Wray Street and Bingley Parade on the east side.
The temporary pipe will follow existing walking tracks. It is expected to be operating within six weeks, subject to obtaining necessary approvals.
Mr Bicknell said it would be necessary to establish fenced-off construction areas on either side of the river and some walking paths through Coogoorah Park and across the river would be closed to protect public safety.
"While there will be some inconvenience, we ask residents to be patient," Mr Bicknell said.
"Our target is to complete this major project before the holiday season. At the same time, we must ensure the integrity of the infrastructure, which will provide an essential service to the people of Anglesea."
Mr Bicknell said the temporary bypass would cut the time trucks were needed to cart sewage from west Anglesea to the nearby Anglesea water reclamation plant.
A leak in the pipe, which was carrying 85 per cent recycled water from Aireys Inlet and 15 per cent domestic sewage from west Anglesea, was detected on August 8.
The pipe was shut down immediately, with a subsequent investigation by divers revealing a 12 cm long gash.
Since then, Barwon Water has been unable to transfer recycled water from the Aireys Inlet storage lagoons to the Anglesea reclamation plant. The lagoons are nearing capacity because wet weather has cut demand for the recycled water for irrigating tree lots.
As a short-term measure, the corporation has been trucking the recycled water to the Lorne and Anglesea reclamation plants, which do not rely on land irrigation. This will continue until the temporary bypass pipe is in service.
The replacement project is being undertaken by the Barwon Water Alliance. Updates will be provided on Barwon Water's website.