water forms generates, sink in water.  see discription

terrain.py, lines 417, use this.

                        if y <= 32:
                            world_init_block((x, y, z), water_block)
                            world_init_block((x, y -1, z), water_block)
                            world_init_block((x, y -2, z), sand_block)
                        else:
                            world_init_block((x, y, z), grass_block)
                            world_init_block((x, y -1, z), dirt_block)
                            world_init_block((x, y -2, z), dirt_block)
                        # atleast a layer of dirt under, reguardless of top two blocks
                        world_init_block((x, y -3, z), dirt_block)
                        y -= 3

and player.py, line 168, add this >
                    # if density <= 1 then we can walk through it. (water)
                    if op not in parent.model \
                            or parent.model[op].density < 1:
                        continue
very simple.  this is all that you need.