Oswald 'Ossie' Bradley was swimming to an island in Bessbrook Pond to remove two Irish tricolour flags from trees.
It is claimed Mr Bradley intended to replace them with a union flag when he got into difficulties. Police are not treating the death as suspicious.
Sinn FÃ©in MLA Mickey Brady last week called for the removal of the flags after they appeared on the island.
A teenage boy managed to bring Mr Bradley ashore at about 17:00 BST on Monday where attempts were made to resuscitate him.
Emergency services took him to Daisy Hill Hospital in Newry, about four miles away, where it was announced that he had died.
Ulster Unionist MLA Danny Kennedy said the death was devastating news for the man's family and the village of Bessbrook.
"This is a very tragic outcome to controversies surrounding flags in this village," Mr Kennedy said.
"This is too high a price for any family and community to pay.
"The entire Bessbrook community will join with me in showing our sympathy and support for the whole family circle.
"He was highly respected and liked within the Bessbrook community. I counted him as a personal friend and I am deeply upset by his untimely and tragic death."
Dominic Bradley of the nationalist SDLP, who knows Bradley family, said the village was in shock.
"I think the action that he undertook yesterday was probably uncharacteristic of him, from what I hear from friends of his," said the assembly member.
"Bessbrook is a mixed community, Catholics and Protestants live side-by-side and, generally speaking down through the years, community relations have been very good.
"I believe some local councillors and the police have arranged for the flags to be removed."
Mr Bradley was a member of the County Armagh victims' group Families Acting for Innocent Relatives (FAIR).
He was involved in the campaign seeking justice for the victims of an IRA gun attack near his village, that became known as the Kingsmill massacre.
FAIR's chaplain Pastor Barrie Halliday, who knew Mr Bradley personally for more than 30 years, said he "loved" the union flag and displayed it at his house.
"Some people say it was totally out of character but maybe we need to take it in context of his great interest in working along with the Kingsmill families - a tragedy of nearly 40 years ago that's going on today.
"Obviously he was affected by it and disappointed by a lack of movement in every area concerning this.
"It had been playing on his mind and it was just something he couldn't stand it any longer - a tricolour being up over the village," the pastor added.
Last week, Mickey Brady of Sinn FÃ©in said last the flags could be seen as intimidating by Protestant residents in the village.
He said the flags could be considered by some as "overtly sectarian, intimidating and threatening".
"The issue is one that is causing contention because obviously, in Bessbrook particularly, there is a mixed community," he said.
"I think you have to respect the culture and nature of the people who live in that area."
Mr Brady said on Monday that the "community was in shock".
A 68-year-old man has drowned in an incident at a lake in County Armagh.