Tourists are deserting Australia's third largest island, Groote Eylandt, and cancelling travel plans as weather forecasters predict Tropical Cyclone Lam will pass close by as a category four storm later this week.

Commercial barramundi fishermen in waters off north-east Arnhem Land were also racing to reach sheltered water before the cyclone hit.

At 2:00pm (CST) on Tuesday, Cyclone Lam was 260km east-north-east of Nhulunbuy and 390km northeast of Alyangula.

Nhulunbuy is almost 700 kilometres east of Darwin on the remote north eastern tip of Arnhem Land.

Alyangula is the largest community of Groote Eylandt, which is in the Gulf of Carpentaria of the NT coast and south of Nhulunbuy.

The cyclone was moving west at 7kph as a category two storm, with winds near the centre of 100kph and gusts of up to 140kph.

Bureau of Meteorology NT director Todd Smith said he was expecting gale force winds to commence early tomorrow in Nhulunbuy.

"Now is really the time for the residents of Nhulunbuy to act," he said.

"This system is expected to intensify and may be around category three or four by the time it gets close to the Nhulunbuy area later on Thursday.

"Wind gusts for a category four cyclone are above 220kph. If the centre of the cyclone moves closer to communities on Thursday then they're the sort of things that could be experienced.

"Unless this system moves over land it's likely that it will continue to intensify and we're likely to see a severe tropical cyclone affecting that Gove Peninsula area from later tomorrow."

The bureau also had a flood watch out for areas of the Gulf coast, Mr Smith said.

"Obviously as the cyclone moves closer to the Gove Peninsula we would expect much heavier falls around that system," he said.

"We have a flood watch current for Arnhem Land and also the Gulf country coast.

"Certainly later in the week and towards to the weekend we could see some significant falls in catchments like the Roper and the McArthur where we could see some significant stream rises from the big rivers."

The most recent forecast track map for Tropical Cyclone Lam showed the system moving close to the coast near Nhulunbuy and then moving south between the mainland and Groote Eylandt.

Tropical Cyclone Lam was upgraded from a category one storm at 11:00am CST.

Tourists depart Groote Eylandt ahead of cyclone

The general manager of the Dugong Beach Resort on Groote Eylandt, Dennis Winchester, said a significant number of guests had brought forward plans to depart the island, which the Bureau of Meteorology has said is tracking to pass close to Groote Eylandt on Friday.

"About 20 people were supposed to arrive today for a conference, but will be going to Darwin," he said.

"I guess guests that don't have absolutely essential travel are not coming to Groote and obviously those that are on Groote at the moment that have a presence that is not of an essential nature, they will in fact be leaving the island," Mr Winchester said.

A category four storm is the second-highest category for cyclones, and is powerful enough to blow away caravans and cause widespread power failures, with gusts up to 279kph.

The skipper of a barramundi boat in the Blue Mud Bay region west of Groote Eylandt told the ABC he and the crew were motoring north, towards the cyclone, in order to find shelter in the nearby Walker River.

But even if they reached the river in time the 50-foot steel-hulled boat would still be in great danger.

"Last time we had a category one in the Walker [River] our anchor chain actually snapped," Craig van Lawick said.

"If it gets to [category] four I don't know.

"We'll probably see if we can tie ourselves in to a little arm of the creek somewhere.

"In a cyclone like that it's not so much the wind but the water that can cause havoc. The cyclone tends to suck water out of the river.

"The boat will be sitting right down in the river then when the surge hits. That's when it can get interesting."

He said he expected to enter the river tonight when the high tide allowed the boat to pass through the shallow river mouth.

"Otherwise if we can't get in I don't know where we're going to go," he said.

"We don't have any choice. We'll be here somewhere. The worst case scenario we'll end up in the mangroves, at least there's no rocks.

"There's no way the anchor will hold [in a category four]."

The Bureau of Meteorology said Cyclone Lam was slowly moving over the Gulf of Carpentaria, which meant it could be very strong by the time it reached land.

"That's unfortunate because it gives it a lot of hang time over water," Bureau of Meteorology forecaster Graham King said.

"And of course the longer it stays over water the longer it has to develop.

"If you look at our track map it just continues in a general west to a south-west direction. It spends a few days over water and continues to develop up towards a cat three or cat four system."

Arnhem Land residents warned to consider where to shelter

A cyclone warning has been issued for people living from Elcho Island to Cape Shield, including Nhulunbuy, which indicates gales are expected within 24 hours or are already happening.

A cyclone watch, which means gales are expected within 48 hours but not within 24 hours, is current for Maningrida to Elcho Island and Cape Shield to Port Roper, including Groote Eylandt.

The bureau warned residents in that area who did not have accommodation up to cyclone code that they should determine where they could shelter.

"The worst case scenario we'll end up in the mangroves," skipper Craig van Lawick says. "At least there's no rocks." ( ABC News: James Purtill )

"This may include arranging to shelter with family, friends or in public emergency shelters, or strong buildings, where available in your community," the warning notice said.

Klaus Helms, chief executive of the Gumatj Association in Nhulunbuy, which is one of the communities in Arnhem Land that may be affected by the cyclone, said people were preparing for the storm but not panicking.

Mr Helms said he expected batteries and water would be in demand but the local community shop was well stocked.

Chris Sheppard, general manager in the Northern Territory of Sea Swift, which provides fuel and food to remote communities including Nhulunbuy and Groote Eylandt, said the stores in the communities should not run out of provisions.

"We have got deliveries to Nhulunbuy and to Groote later this week, Thursday and Friday, so we will just see exactly what is happening with the cyclone and work around that," Mr Sheppard said.

"It won't be a massive delay for us, a day, or two days maximum."

But Groote Eylandt resident Cheryl Bell said the local supermarket may not be able to cope if there is a rush of people buying emergency essentials.

"I wouldn't say that the supplies on Groote at the moment are all that adequate," she said.

Chief executive of the Anindilyakwa Land Council on Groote Eylandt, Mark Hewitt, said they were well prepared for the impending cyclone.