Ian Byatt, the director general of the water regulator Ofwat, said that the water saved would be enough to supply four million people.
The industry will be required to reduce leakage rates by 9 per cent in the current year and by a further 8 per cent in 1999-2000, although some suppliers have been set tougher targets.
Thames Water has been told to reduce leaks by 26 per cent over the two- year period to 665 megalitres a day.
Shares in the company fell by more than 3 per cent from 1085p to 1050p.
Severn Trent, which has been told to cut leaks by 14 per cent, saw its shares fall from 1022 to 1014p, while shares in Anglian, which has to achieve a 17 per cent cut, fell 18p to close at 845p.
The industry had argued that it was now close to its "economic" leakage rate - the level at which it becomes cheaper to develop new sources of supply than to continue plugging leaks in the network.
But Mr Byatt has rejected these arguments. Mr Byatt has only accepted the economic leakage assesssments of six out of the 27 water companies as the basis for assessing their new reduction targets.
The regulator added that all the water companies needed to produce new assessments of their economic levels of leakage before they submit their draft business plans next year.
These will be factored into the new price limits Mr Byatt will set for the five-year period from 2000.
Mr Byatt also said he was disappointed at the efforts of the water companies to promote water efficiency and quantify the level of savings such initiatives could deliver.