Loon Lake is located in a relatively small, closed drainage basin of approximately 14 square miles (7,200 acres) with only intermittent streams that stop flowing in the summer months. The lake has the smallest ratio of watershed to lake surface in the state of Washington, making it very sensitive to changes in its environment. Runoff from the lake and seepage from its deep aquifer form the headwaters of the Colville River. The eastern portion of the watershed is dominated by Loon Lake Mountain (elevation 3,476 feet) to the southeast and Deer Lake Mountain (elevation 3,747 feet) in the northeast. A low ridge at an elevation of about 3,000 feet forms the western and southwestern boundary. The land at the north end of the watershed forms a broad glacial valley which drains northward. Highway 395 roughly bisects the watershed in a north-south direction. The highway and the roadbed of the BNSF railroad roughly parallel the east shore of the lake.
