Toledo issued the warning just after midnight after tests at one treatment plant showed two sample readings for microsystin above the standard for consumption.
Gov. John Kasich's emergency order will allow the state to begin bringing water into the Toledo area.
Toledo leaders were setting up water distribution centers around the city, limiting families to one case of bottled water. Some stores that were receiving new shipments of water putting limits on how much people can buy.
"We're going to be prepared to make sure people are not without water," Mayor D. Michael Collins said.
He said at a news conference that city officials hope to know later Saturday how long the warning will stay in place, and he pleaded with residents not to panic. There were no reports yet of people becoming sick from drinking the water, Collins said.
Sample of water were flown to the federal and state Environmental Protection Agency offices in Cincinnati and Columbus for additional testing, officials said.
Police officers were called to stores as residents lined up to buy bottled water, bags of ice and flavored water.
"People were hoarding it. It's ridiculous," said Monica Morales, who bought several cases of bottled water before the store sold out of water a half-hour after opening.
Some neighboring communities that aren't connected to Toledo's water system were offering their water to people who brought their own bottles and containers.
The city's advisory said Lake Erie may have been affected by a bloom of harmful algae that produces the toxin. Consuming the tainted water could result in vomiting, diarrhea and other problems.
The advisory covers city residents and those in Lucas County served by the city's water supply. The city said more tests are being run.
Toledo asked restaurants to close for the day because of the water warning. Toledo's public school system canceled all its events Saturday.
The University of Toledo closed its campus for the day and encouraged students who are from outside the Toledo area to return to their homes.
Operators of water plants all along Lake Erie, which supplies drinking water for 11 million people, have been concerned over the last few years about toxins fouling their supplies.
Almost a year ago, one township just east of Toledo told its 2,000 residents not to drink or use the water coming from their taps after tests on drinking water showed the amount of toxins had increased.