This sounds exactly like the work of a muskrat if the hole is just underneth the surface of the water. It is the protective entrance to his den.

I've had this exact problem and I can tell you that it's not that easy to fix, but it can be done. Follow the steps below.

1) Trap or shoot the muskrat. You can use a "have-a-heart" live trap. Muskrats like carrots and apples. Put it near the hole, halfway in the water. Cover it with grass and wait. Or, hang out around dusk or dawn with a 12-gage and shoot the punk.

2) Don't waste the bentonite unless you are dealing with tiny seapage holes that you can't see. Find good red clay (hopefully near by) and bring about a wheel-barrel load to the hole. Try digging down into the bank near the hole, you will likely find an underground stream that is eroding your dam. When you find it dig around enough so the whole width of it is exposed. Now, start packing in that clay. When you've got it blocked off pack clay into the original fist-sized hole and pack it in tight. Then I would recommend another wheel-barrel load of gravel-soil mix on top of the now-plugged hole. If it still seaps *then* pour a blanket of powdered bentonite, or look for more holes. Muskrats are busy little bastards.

A good passive muskrat prevention method in the future is to remove catails from your pond. If they still hang out there you may need to line the dam with chicken wire, down a few feet from the surface.

Good luck!