Over-diluted formula will not provide adequate nutrition and the baby may fail to thrive and grow. The American Academy of Paediatrics recommends boiling water for infant formulas. It is advised to heat the water until it reaches a rolling boil, continue to boil for one to two minutes and then let it cool. That should take care of all the bacteria and parasites that might be in the water. The American Academy of Paediatrics does not have any recommendations about bottled water.
Bottled water is fine, but it still needs to be boiled.
There's no reason to think that bottled water is any safer than city water. Dishwashers tend to sterilise bottles and nipples fairly well. They can also be sterilised by placing them in a pan of boiling water for five minutes. Warming the formula before feeding isn't necessary for proper nutrition, but most infants prefer the formula at least at room temperature. The best way to warm a bottle of formula is by placing the bottle in a pot of water and heating the pot on the stove.