In general, "The Water Level" of any given video game is the bad one, and in some cases these sequences have become infamous. Remember the Water Temple? Gloomy Galleon? Those unfortunate underwater sequences in Devil May Cry 2 that are somehow worse than the rest of the game by a wide margin? Ok, maybe that last one was just me.
Thus, I ask the question that is also the title of this topic. The closest I can get off the top of my head is Jolly Roger's Lagoon in Banjo-Tooie, but even then I wouldn't call it one of the better levels in the game. I guess you could also count Ecco the Dolphin, though that entire game is a water level.