MidCoast Water is doing damage control after a chlorine overdose in one NSW town’s water supply.

Residents in the town of Gloucester, near Newcastle, can drink their tap water once again, after being told to avoid it due to high levels of chlorine.

MidCoast Water issued the alert, saying the problem was caused by a failure in chlorination equipment at the Gloucester water treatment plant.

Staff have now flushed the system and held public meetings in the towns.

The company has also launched an independent investigation.

It will be performed by Hunter H2O, and has been set up to find the cause of the incident and assess the organisation's response.