The narrow L-shaped lake is surrounded by Lago Puelo National Park.

The lake is fed by the small rivers, Azul and Quemquemtreu.

The lake is surrounded by typical Valdivian temperate rain forests, more typical of the maritime-influenced area of Chile rather than the eastern side of the Andes in Argentina.

The term Puelo seems to have its origin in the Mapuche expression puel-có, (puel = east, co = water) meaning something like "Water at the East", as it was located in the easterly part of the area occupied by the indigenous Mapuche people.

The town of Lago Puelo is located in the narrow valley of the Azul River about 5 kilometres (3.1 mi) north of the lake.