Leptospermum lanigerum is endemic to Australia, mainly distributed within the south eastern states. Native populations are found in eastern South Australia, across Victoria and southern New South Wales, as well as the whole of Tasmania. Plants are common and widespread, predominantly found in wet, swampy areas and along river banks, sandy coastal heaths or within woodlands. L. lanigerum is occasionally found growing in cool temperate rainforest in western Tasmania, however is a doubtful true rainforest species due to the need for disturbances such as fire to release seed. The hardy nature and preferred habitat of this plant makes it useful in riparian restoration and stream bank stabilisation, as they thrive in swampy areas where many other species do not.
