Waters from Tangjiashan lake, formed by the 12 May earthquake, burst into the abandoned quake-hit town of Beichuan.
People said they saw corpses from the earthquake floating among the debris.
Beichuan had already been badly damaged in the earthquake, which left nearly 70,000 people dead throughout Sichuan province.
Some residents said they still had possessions in the town.
People gathered to watch from higher ground as the town was submerged.
The floods came after troops used explosives to blast channels in the mud, to take the water from the lake towards the town.
More than 250,000 people were evacuated from areas downstream from the lake as it became increasingly unstable.