Tasmania's biggest salmon producer Tassal has been told by the state's environmental watchdog to destock one of its farming leases at Macquarie Harbour by the end of the month.

Last month, the Environment Protection Authority (EPA) reduced stocking limits from 20,000 tonnes to 14,000 to address deteriorating conditions in the harbour.

In November, the EPA said conditions in the harbour had worsened with increased levels of bacteria known as beggiatoa and low levels of oxygen.

Tassal was ordered to destock a lease closest to the World Heritage Area.

Today, the EPA made public a report cited by Four Corners on Monday which revealed all marine fauna for at least 500 metres around a Tassal salmon lease close to the World Heritage Area was dead.

The Institute of Marine and Antarctic Studies (IMAS) report revealed "worrying" dissolved oxygen levels around salmon leases in the harbour, warning it could lead to significant environmental damage.

"That's why Tassal has been directed to de-stock that lease and they won't be able to re-stock it until it's recovered sufficiently and I'll be looking at the animals present before I allow them to put fish back in the water," EPA director Wes Ford said.

EPA boss ready to back fish cap in court

Mr Ford said he stood by his decision to cap salmon tonnes at 14,000.

"You have to remember that I've come from a starting point where the original assessment model done by industry was for 29,500 tonnes with a biomass cap set last year at 21,000 tonnes," he said.

"I've set it at 14,000 tonnes. That's what the information I believe supports and that's what I'll continue to assess."

"I'll be defending my position in court."

In a statement, Tassal said it had reduced stocking rates in Macquarie Harbour by 20 per cent in 2015 due to concern about conditions.

"We have been actively destocking the Franklin [lease] site since the beginning of January 2017, harvesting to maximum capacity.

"We are providing regular updates to the EPA. We are committed to getting this site back into compliance."

In November, Tassal issued a statement acknowledging "benthic compliance issues" regarding the seabed.

'Government has allowed Tassal to farm a dead zone'

Lobby group Environment Tasmania has given its full support to Huon Aquaculture's legal proceedings.

"The latest report from IMAS scientists shows that all marine life under Tassal's largest lease in Macquarie Harbour is dead," spokesman Laura Kelly said in a statement.

"The Government knew this last November, but have allowed Tassal to farm in a dead zone until March this year.

"These legal proceedings provide some hope that action will be taken to protect Macquarie Harbour and the jobs that rely on it, and that some of the evidence sought by Environment Tasmania but declared 'commercial in confidence' by the Hodgman Government will finally come to light."