this may or may not be possible without bugs, but this is just an idea if you want to have multiple water regions at different heights (like a pond on a hill, and a lake down below), because, zeroeditor/zero engine-created water can only be at one height

for oneof them ,make a large, collisionless, cube model of a body of water, with a scrolling water texture (should look as realistic as possible) in xsi or something, and place it in your map in zeroedit. to shape it, cover up bits and ends with terrain and objects.

bugs include:
-no water splash effects for jumping, walking, or underwater explosion (so it would look weird, having a grenade explode in a burst of fire, underwater
-the scrolling texture will go in one direction, so unless you want this thing on the side of a mountain or hill, you can place and rotate the water model on top of itself and next to each other multiple times on your world to make it seem like the water has no specific direction,

death/damage regions don't really seem possible, unless you want it to be a poisoned body of liquid, in which case, set it up to cover the whole of your lake.
another solution is to have the terrain have a slow drop downwards with a death/damage region at a specific height, and when the unit is fully submerged under the "water", they die.

again, i can't/haven't confirmed how possible this is, but it seems likely.

Your idea sounds like nothing more than an object that simulates water much like nab2_prop_fountain does on Naboo: Theed. This would be a good example to disect and follow.

http://www.secretsociety.com/forum/disp ... sp?mid=834