Local cases of Buruli ulcer, a skin disease most commonly found in Africa, have surged by 400% in the last four years, experts say.
Infections have also become more severe and spread to new areas.
Doctors do not know how to prevent the disease, which is caused by bacteria that breaks down tissue.
WARNING: Graphic image below
A record 275 new infections were recorded the state last year, marking a 51% increase on 2016.
Infectious diseases expert Dr Daniel O'Brien said cases of the Buruli ulcer, or Mycobacterium ulcerans disease, had become "frighteningly more common and also more severe" in the region.
It was unclear why the ulcer, typically found in tropical areas, had emerged in the temperate climate of Victoria, he said.
What is the Buruli ulcer?
- A skin disease caused by the bacterium Mycobacterium ulcerans.
- The bacteria emits toxins that destroy skin cells, small blood vessels and the fat under the skin, leading to ulcers forming and skin loss.
- The ulcer gets bigger with time and can lead to permanent disfigurement or disability.
- Usually affects limbs but can also be found on the face and body.
- Doctors do not know how the disease is transmitted to humans but it's believed to arise from the environment and soil.
- There are also theories that mosquitoes can carry the bacteria.
"No one understands what's happening and what's driving this epidemic," Dr O'Brien, a co-author, told the BBC.
"We can offer clues but not definitive advice. It's a mystery."
He said some theories involved factors such as rainfall, soil type and wildlife. Last year, authorities found traces of the bacteria in local possum faeces.
"The problem is, we don't have the time to sit around and pontificate about it - the epidemic has reached frightening proportions," he said.
The ulcers are difficult to treat and patients often experience a recovery period of between six and 12 months. Many people also have to undergo reconstructive surgery, Dr O'Brien added.
Victorian health authorities say they have spent more than A$1m (£550,000; $780,000) on researching the disease, and have started education campaigns to raise awareness about it.
Until a few years ago, infections were more commonly reported from tropical regions in Queensland with occasional cases in other states.
The disease is more commonly found in rural West Africa, Central Africa, New Guinea, Latin America and tropical regions of Asia.
In the developing world, the disease is associated with wetlands and stagnant water, however in Australia cases have largely been reported from coastal regions.