The Lar Dam was constructed from 1974 to 1980 in the Lar River valley at the foot of the Damavand Volcano. The valley walls consist of Mesozoic limestone and Quaternary volcanic rocks, overlain by thick lacustrine deposits. Prior to dam construction, a few sinkholes were observed in the reservoir area, but after impoundment, several new sinkholes formed and leakage occurred through downstream springs. Despite extensive treatment works, the reservoir has currently impounded only 40% of its designed capacity, about 35 years after the commencement of operations. The Lar Reservoir is located inside the area of a large palaeo-lake, which formed as a result of blockage of the river valley by eruption of the Damavand Volcano during the Pleistocene. This lake existed for thousands of years, developing deep karst conduits in the limestone below the volcanic rocks toward downstream springs. With the construction of the Lar Reservoir, relict karst conduits were revived and leakage occurred. Two paths are proposed for reservoir leakage, considering the region's historical geology, present hydrogeological setting, tracer tests and isotopic studies, as well as the response of spring discharge and borehole water level to reservoir filling.