Mt Gambier is a large town built on the extinct volcano (Mt Gambier). The most famous lake in Mt. Gambier is Blue Lake, which is often grey, although changes to blue in November (for some reason). There are also a number of other lakes in the area with several walking tracks around them, as well as picnic tables and wildlife parks.
A popular activity is cave diving within the Engelbrecht Cave, where there are also tours down to the water table. In the evening you should definitely go to the Umpherston Sinkhole, which are beautiful floodlit gardens popular amongst possums.
There are plenty of camping grounds in the area, as well as several hotels offering accommodation and meals. It is a beautiful place to stay and has wonderful scenery and places to visit. You can get to Mt Gambier from Adelaide on the Premier Stateliner service, as well as from Melbourne on the V/Line.