Kanahooka couple Norman and Fay Thompson were fishing about 800m from shore, near Tallawarra power station, when they spotted the seal close by.

"He was coming up to the boat and splashing around. We thought it was a dolphin at first," Mrs Thompson said.

They watched the seal for almost two hours as it dived in and out of the water hunting for fish. Mr Thompson said the experience had been a rare treat.

"I'm 71 now, and I started skiing on the lake when I was 14, but I've never seen a seal in here," he said.

"It just goes to show the quality of the water here now; it's improved out of sight."

Mr Thompson said he had noticed an increase in recreational use of the lake.

"Twenty years ago we used to sail on the lake and we'd be the only boat on here. Now there are boats everywhere.

"It's good, it's coming to life."

The sighting of a great white shark in Lake Illawarra in April was hailed by authorities as a sign of the lake's improved health.

Rolf and Brenda Lenhart, who were fishing with the Thompsons, said the seal had caused quite a stir.

"We thought we'd found the great white shark," Mr Lenhart said.