NI Water says it is "dealing with a break-in" and has informed police after flags were erected at Rathfriland water tower.
Union and Northern Ireland flags have been placed on top of the tower in the Co Down town.
The top of the structure has also been painted red, white and blue.
Sinn Féin South Down MP Chris Hazzard branded it an "act of vandalism" and questioned how access was gained to the tower.
"Given the scale of this building, it clearly was not possible to carry out this vandalism without gaining access to the tower," he said.
"NI Water have questions to answer about how this was allowed to happen, and I will be raising those questions directly with senior management."
He added: "Rathfriland is a mixed town and this display was clearly intended to mark out territory and intimidate.
"It was erected for the Twelfth and still no action has been taken to remove it. That is entirely unacceptable.
"NI Water is a public body, and this is a publicly owned building. They need to ensure this display is removed and steps are taken to ensure there is no repeat."
The red, white and blue paint atop the tower has been present in previous years. Flags have also been erected on the tower on previous occasions.
Responding on Twitter, NI Water said: "NI Water is dealing with a break-in at Rathfriland Tower. PSNI have been informed."
A PSNI spokeswoman said a report was received yesterday afternoon at about 3.30pm.
"Police received a report of flags being erected and damage being caused to a water tower in the Rathfriland area," she said.
"Enquiries are ongoing."
In a further statement, an NI Water spokeswoman said: “NI Water can confirm a break-in occurred at Rathfriland Tower and flags were erected without permission.
"It is believed the outer wall was scaled and the strengthened lock to the tower’s inner steel access door was cut open.
"Specialist equipment would have been required to carry out this activity.
"NI Water is liaising with the PSNI. We are also organising for repairs to the door to take place and the safe removal of the flags.
"NI Water is willing to engage with local political and community representatives in relation to this issue.”
