Hi, I do not think that fuel can be diluted with water, as those two liquids do not mix. All cases I've heard of were of diluted fuel with lesser quality fuel types, like lower octan or less fuel additives than supposed to be. In those cases your engine will have less power, will create more polution, the engine internal parts will get more dirty from all kinds of residues resulting from not complete fuel burning etc. - all depends on the missing ingredients, how much lower the quality of the mix is, etc. Once or twice will probably not do much damage, but if you happen to be a regular customer of a station that mixes lower quality fuel you will feel the problems in due time.