BASIC services in Kainantu, Eastern Highlands, may grind to a complete halt due to a compensation demand which has starved the Highlands gateway of water.
Health services at the Kainantu hospital, the Kainantu high and primary schools, government services and businesses have been affected.
Last week, Highlands public servants threatened to walk off their jobs if the water shortage continues.
The Kainantu district administration has tried many times to resolve the situation but to no avail.
The landowners have been demanding compensation for the past 20 years and have now stopped the flow of water into Kainantu.
Sources said the police station and hospital had already scaled down operations.
Police officers took afternoon hours off to search for water at nearby streams and rivers.
Kainantu Hospital chairman Jorifa Yubiko has given hospital staff options to either shut down services or reduce working hours.
He said Kainantu town also had no proper sewerage system and that the water supply problem was making the situation even worse for the residents.
A community leader, Yubiko, said the high school had already reduced classes to half day while business houses were carting water back to their premises to maintain operations.
He appealed to the Government to intervene immediately.
Public servant Michael Ray said some villagers were cashing in on the situation by selling water from creeks for K1 a bucket.
He said he and other public servants were getting fed up and could walk off their jobs.
The district administration said the European Union had approved K10 million for a water supply project and that they were waiting for counter-funding from the Eastern Highlands and national governments.