The graffiti was spotted on the sign at the intersection of Waddamana and Highland Lakes roads at Steppes, east of Miena, on Sunday.

The dual name for Great Lake, yingina, had also been sprayed over, with the racist slur making reference to the dual name.

Aboriginal leader Rodney Dillon said it was disappointing, but he believed such instances of clear racism were becoming less common in Tasmania.

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"We should be calling it out, but I think the wider population is getting a better understanding of the hurtfulness of this racist stuff," he said.

"I think it's happening a lot less than it used to.

"I pity them, to be honest. It's sad that people are like that. I feel sad for people in this day and age who want to write hateful stuff like that, they might have other problems going on in their life."

The Department of State Growth has confirmed the graffiti has been removed after it was reported on Monday.

"Offensive graffiti on the State road network is not tolerated," a spokesperson for the department said.

Anti-Muslim graffiti was also spray painted on another sign on nearby Poatina Road more than 18 months ago, which has since been covered.

Anti-Discrimination Commissioner Sarah Bolt said there was the potential for prosecution against anyone found to engage in racist graffiti.

"The graffiti on the sign is both racist and offensive and in the event that the identity of the offender were known action against them could be taken under the Anti-Discrimination Act," she said.

"I am without doubt that members of the Tasmanian Aboriginal community would, and rightly so, be offended and insulted by the graffiti.

"I am unable to comment with any certainty as to how prevalent , or otherwise, graffiti such as that upon the sign is in Tasmania. Generally speaking it is only when complaints or reports are made to my office that I become aware of such antisocial behaviours."

Graffiti can be reported to the Department of State Growth on 1300 139 933, 24 hours a day.