SYDNEY (AFP) - A rural Australian town was in shock on Wednesday after a mother and her three children were shot dead at a farmhouse in a "horrific scene" and a body believed to be the father was pulled from a dam.

Police said the body retrieved from the waterway at the property by divers on Wednesday afternoon was found with a gun and had "significant injuries", although they did not provide further details. The search of the dam followed the grisly discovery of four family members at a homestead near the town of Lockhart about 535km south-west of Sydney on Tuesday afternoon.

The victims were named in local media as Mrs Kim Hunt, 44, her son Fletcher, 10, and daughters Mia, eight, and Phoebe, six. The children's bodies were inside the house, while the mother was found dead on a path at the back of the house.

The body pulled from the dam was believed to be 44-year-old Mr Geoff Hunt, the father, with the homicide squad now taking over the investigation.

Wagga Wagga Superintendent Bob Noble said the body had "significant injuries which are not inconsistent with others that we've seen last night".

"We have five deceased people. We believe they were all members of the same family," he said. "There's nothing to lend us to believe that there are any other victims or persons of interest."

Mr Noble said it was too early to speculate on what may have led to the killings.

He added that the deaths had taken their toll on the local community and police officers, some of whom lived in the small town.

"It's been a difficult investigation and operation generally and to that end, there's a lot of people in town here that are suffering greatly," Mr Noble said.

"I spent some time at the school (where the children studied) this morning and there's little hearts breaking all over the place."

Earlier, he described the crime scene as "horrific", adding: "I don't think even the most hardened professional could remain unmoved by what's out there.

"It's certainly not something I've encountered anything similar to before, and I hope not to ever again."

Mr Noble said the mother and children were believed to have died late on Monday or early on Tuesday of gunshot wounds.

Mr Noble would not comment on reports that a suicide note was found at the property, but said the Hunt family was well known in the area.

Lockhart mayor Peter Yates told regional newspaper The Daily Advertiser the deaths had "devastated the community".

"We're all saddened by it, of course... I know the family, they're a well-respected farming family and it's just so devastating."

The mother, who worked as a clinical nurse educator at a local health service after a serious car accident in 2012, was described as a "bubbly, positive, caring and passionate nurse who was dedicated to patient care".

"Her death is a huge loss and she will be greatly missed by all of her colleagues and friends," the health service's chief executive Jill Ludford told reporters.