The mystery surrounding a strange green liquid which leaked into the Yarra River has been solved.

The state's environmental watchdog said the bright green substance was caused by a drain dye, fluorescein, which was used plumbers on Thursday to identify any leaks in the river's underground pipes.

The Environmental Protection Authority is investigating after mysterious green sludge leaked into the Yarra River.

"The substance appears to be fluorescein, a dye commonly used by plumbers and contractors to trace and identify underground pipes," An EPA spokesman said.

"Fluorescein is non-toxic and biodegradable, and the slick is likely to dissipate within the next few hours."

The strange green sludge was spotted in the water beside the Flinders Street station entrance near the Evan Walker Bridge just before 3pm on Thursday.

The bright green liquid spilled out for about 10 metres along the side of the concrete walkway.