It said the "pollution incident" affected the Annsborough River on Saturday afternoon and the cause was identified and rectified shortly after.
The chemical spillage has been cleaned up and there is no further risk to the river, the company said.
NI Water said it would continue to work with the Environment Agency.
The Annsborough River is a tributary of the Carrigs River. which runs from Castlewellan through the village of Maghera and into Dundrum Bay.
The incident was reported to the Northern Ireland Environment Agency (NIEA) pollution hotline on Saturday.
Staff from the agency and officers from the Department of Agriculture's fisheries team immediately went to the scene and conducted a detailed investigation.
"The source was traced to premises where it was discovered that a chemical had escaped into the river causing significant pollution," a spokesman for the department said.
"Statutory water samples were collected and evidence gathered with a view to an enforcement action. To date the number of dead fish is in excess of 1,600.
"All relevant authorities have been notified, including local council environmental health as Dundrum Bay is a significant shellfish production area."
Adrian Truesdale, who owns a caravan park beside the river, said he thinks the number of fish killed could rise.
"With part of the river being tidal, I would imagine that a lot from Saturday afternoon and Sunday have already been washed on down into the bay," he said.
"My worry is because it goes down into Dundrum Bay, other fish that would come in and go up the Moneycarragh river would also be affected by this."
Accidental discharge from a treatment works caused the deaths of more than 1,600 fish in a river near Newcastle, County Down, NI Water has said.