Radio Australia's Connect Asia program reports the lake is being filled with sand to make way for development, forcing water into surrounding homes.
A $US79 million contract gave the green light for Shukaku Inc to develop a 133 hectare commercial property on the lake and its surrounds in February 2007.
International non-government organisation, Bridges Across Borders, says if the development goes continues without the agreement of Boeung Kak residents, it will cause the largest forced eviction in Cambodia since 1975.
David Pred, Cambodian country director of Bridges Across Borders Southeast Asia, told Radio Australia work began two weeks ago and has already had a dramatic impact.
"The waters of the lake are rising as the sand is going in and this is starting to flood people's homes," Mr Pred said.
"So the people who are living in and around the area where the sand is being pumped are basically being forced out, drowned out, of their homes.
"Almost all of them in that vicinity have accepted the compensation that's been offered to them basically under extreme force and intimidation," he said.
Opposition Sam Rainsy Party MP Son Chhay says it's not just the flooding that is causing immediate grief for residents.
He says people are also concerned about a shocking smell coming from the water.
"The families who live nearby have come together and complained to the governor's office for a few days now, but have no solution to the problem," he said.
Need for transparency
Son Chhay says the government must make public any documents that assess the potential impact of filling the lake.
"We have tried to question the officials from the ministry of environment and according to our regulations any kind of lake filling must have some approval from the ministry of environment but so far we have not seen any document or report," Mr Son said.
David Pred maintains the lease agreement between the the Municipality of Phnom Penh and Shukaku Inc. is illegal under Cambodian law.
He says there's currently a court case underway, filed by community plaintiffs, requesting the court to issue an injunction to stop the filling of the lake.
Mr Pred says there's widespread anger at the development.
"This is wholesale theft, grand theft what's happening in Phnom Penh today.
"The rich and the powerful seem to think they can get away with this type of massive injustice because there's no rule of law in Cambodia.
"But the people who are living in Boeung Kak and many of us who live in Phnom Penh and support them are standing together in solidarity and saying no, you can't get away with this, we're not going to let this happen".
Son Chhay agrees and says the compensation plan has fundamental flaws.
He says some families who agreed to the compensation offer, which involves being resettled to the outskirts of Phnom Penh, have now changed their minds.
"The place that they moved to has no electricity, no water, no school and when it rains there's water all over the place," Mr Son said.
"The families in the area are very unhappy, they didn't get a good deal from the government.
"More and more people are willing to join in and fight this project," he said.