Water is one of the substances that can't be placed by the player. On newly generated maps water is quite common at ocean level. It can also be found in pools underground and lakes above ground.
Water spreads horizontally and downwards by duplicating itself to empty squares. Water spreads very fast, about the speed of a walking player, and if left alone will cover everything at or below the level the water started at if there's a direction connection to it. Water is transparent, and will also slow down your character if it is moving through it.