Water is a fluid that will spread forever unless it encounters a higher elevation such as a wall or a mountain. Water will not break the law of gravity. It will flow down if you dig underneath it.
Sources of WaterEdit
In Towns there is generally one river that spans the map and one or two lakes that may be connected to the river. The river has infinite water but the lakes do not unless connected to the river.
Getting Rid of The LakeEditIf you want to get rid of the lakes in your game its pretty simple to do. Mine out an entire level in the dungeon except for the blocks that keep the lake formed. After you've mined out the entire layer just get rid of a few blocks so that the lake flows into your cleared level. Make sure your Townies get out of there immediatly because they can and will drown. It's usually a good idea to build a wall with a floodgate that ensures the water never leaves a certain area. It can also be used to make sure your Townies don't go into a flooded section of the dungeon. After a few hours the lake should have drained out into the cleared section and evaporated. This leaves the entire area the lake occupied empty from that level up.
Getting Rid of The RiverEditThe river is a lot harder to get rid of than the lake. This is because the river has an unending flow of water that will fill up any water you delete. The only way to block that flow is to delete some water using the Right-Click menu then have a townie place a fluid blocker in the river before the water fills up again. (Note: Still needs testing for completely blocking the river. I've only tried to place one block in the river.)
Fishing is one of the best ways to feed your townies and you can only fish from water.