Water can be affected a number of ways by volcanic activity. It depends
on the nature of the activity and what type of water there is. For
example, a lava flow entering a small lake can easily boil all the water
away and have a pretty obvious effect. A lava flow entering a big lake or
the ocean will also boil a bunch of water away but the affect on the body
of water may be limited to the area right next to the flow. During many
explosive eruptions, falling ash will contaminate small streams and ponds
and perhaps also drinking water supplies. Not only are the ash particles
not good for you, they are sometimes chemically reactive as well. Many
eruptions result in catastrophic floods down pre-existing waterways -
either from melting glacial ice and snow, or from causing very heavy rains
during eruptions.
There are probably many other ways in which volcanic activity can affect
water, I've only suggested a few.
Scott Rowland, University of Hawaii