Lago Xolotlan, also known as Lake Managua, is situated in the Nicaraguan hydrographic depression or Nicaraguan rift valley, which is separated from the Pacific Ocean by a strip of lowlands, to the northwest of Lake Nicaragua, the largest lake in Central America. The two lakes put together cover almost 10% of the country's total area.

The depression is probably a graben structure formed in the late Tertiary or Quaternary period, though the origin of these two lakes is often described as tectonic or volcanic. There is considerable volcanic activity along the rift valley, and part of it is employed for geo-thermal energy generation.

Lake Managua is endorheic, or a closed lake system in which evaporation approximately equals inflow, and its water level is controlled primarily by evaporation. According to the Nicaraguan Institute of Natural Resources and Environment (IRENA), there are stratigraphic evidences that the lake water level was once higher than the present level by 10 15 m. The lake would then have formed a single great inland water body together with L. Nicaragua. A broad river had connected the two lakes until the 16th century. The remnant of this connection, the Rio Tipitapa was a free-flowing stream as late as in 1840, but ceased to function as a regular outflow by 1850 and now serves as only an occasional overflow mechanism. The total inputs of water are so closely balanced with the average evaporation (2,270 mm yr-1) that the overflow across the threshold of the Rio Tipitapa of 40.75 m has occurred only three times (1933, 1955 and 1982) in recent history.

The lake's mean depth is 7.8 m and the deepest point (26 m) is found in a pit near the volcanic Momotombito Island. A greater part of the drainage basin is located to the north of the lake and drained by three major tributary rivers, Rio Viejo, Rio Sinecapa and Rio Pacora. The total inputs of water varies widely within the drainage basin, geographically, annually and seasonally.

The "dirty dozen" of pesticides from agricultural and pasture lands contaminate the lake. Untreated sewage of one million population of Managua City on the southern shore is also poured into the lake. About 300 small industries discharge their effluents containing mercury, lead other heavy metals and pollutants. Inflowing sediments are mostly fine particles and rich in organic matter. Furthermore, wastes of geothermal energy plants as well as hot spring water containing rich arsenic salts, boron and other substances enter the lake (1, 2).