The 15-km-long and 49-square km lake near Longtoushan was formed when landslides blocked the Niulan River after the 6.5 magnitude quake hit the mountainous region on Sunday.
The lake has already inundated about 370 homes, officials said today.
Given the strong possibility of the lake completely bursting its banks, many locals have fled, and 4,200 residents have been resettled from the lower reaches of the river, state-run Xinhua news agency reported.
However, the level rose by four to five metres in 24 hours, the National Administration of Surveying, Mapping and Geoinformation has said.
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The army has said it plans to use about two tonnes of dynamite to blow up the blockage which formed the lake.
Meanwhile, the death roll from the powerful quake rose to 615, four days after it devastated Yunnan Province.
Among the reported deaths, 526 were in the worst-hit Ludian County and 76 in Qiaojia County.
The official tally showed that in addition to the deaths, there were 114 missing and 3,143 people injured due to the quake.
The earthquake, the strongest to strike Yunnan in 14 years, affected over 1.08 million people in the cities of Zhaotong and Qujing.
The deadly quake was measured at level IX on the 12-level MMI (modified mercalli intensity) scale at its epicentre, the China Earthquake Administration announced today.