A new locally produced P-inactivation agent, Z2G1, was tested on sediment cores from Lake Okaro, New Zealand, for phosphorus (P) removal efficacy and any non-target side effects prior to a whole lake trial to manage internal P loading. Z2G1 is a granular product which settles rapidly, and was designed as a sediment capping material. It is a modified zeolite which acts as a carrier for the aluminium (Al)-based P-binding agent. It was found to have a high affinity for P and did not release Al into the water column. Continuous-flow incubation study results showed that a thin layer of Z2G1 (~2 mm) could completely block the release of P from the sediment under aerobic and anoxic conditions, and remove P from the overlying water in contact with the capping layer. The Z2G1 capping layer neither released metals itself nor did it induce the release of metals from the sediments, and the zeolite substrate absorbed arsenic and mercury from the geothermally influenced Lake Okaro sediments. In general, zeolites are strong cation absorbers and the zeolite substrate of Z2G1 absorbed ammoniacal nitrogen, making it the only sediment capping material to actively remove both P and N. There were, however, indications of a suppression effect on microbial denitrification by the Z2G1 capping layer under aerobic conditions. Overall, the Z2G1 sediment capping material is a highly effective P-inactivation agent which might be a useful material for managing internal P loads in eutrophic lakes.