Pretty much any water leaking inside the system will be bad mojo.
The water by itself doesn't conduct electricity, it's the stuff *in* the water that carries it. So even if you put pure water into the system, as soon as it leaked and came into contact with any surface that wasn't perfectly clean it would start to conduct again. Search for filtered water in the forums for a couple of worthwhile threads on the subject.
Many people like distilled water because they feel it reduces the battery effect within the system and possibly has better thermal properties. It only costs a couple of dollers a gallon and it certainly can't hurt.
Unless you go with non-conductive oils in an exotic system you'll have to worry about leaks.
Hope this helps,
Mark