British Waterways, the government agency that owns the 2,000-mile network, is already working on a pilot project with Thames Utilities, which supplies London and Berkshire, to supply 2 million litres a day by pumping water from Birmingham, which suffers from rising groundwater levels, down the Oxford canal. It already supplies half of the drinking water for Bristol from the Gloucester and Sharpness canal. This could be mirrored in other parts of the country.
British Waterways is looking at other joint ventures with privatised water companies.
The idea is being backed by the Government, which yesterday announced a package of measures to revitalise inland waterways, including the ability to seek private finance for joint initiatives.
John Prescott, the Deputy Prime Minister, said he was increasing British Waterways' annual grant by pounds 8m to pounds 59m over the next three years.
He is determined to: "unlock the potential of our waterways" to encourage more leisure use as well as exploiting the potential for "green" commuting and freight transport.
A British Waterways spokes man said: "The waterways have great potential for alleviating lack of water in some areas and the abundance of water in others. This is something we will be working on in the future."
A spokesman for the Department for the Environment, Transport and the Regions, for which Mr Prescott is also responsible, said: "The Government wants to see great use of facilities that are already there. A couple of years ago some areas suffered from drought and, with climate change, this could happen again. It makes sense to use what we have rather than dig big holes in the ground for reservoirs."
British Waterways said there was a pounds 260m backlog of investment, of which pounds 90m was for urgent safety work.
Speaking on a trip along London's Regents Canal from King's Cross to Islington, Mr Prescott said: "For far too long canals have been regarded as a decaying relic of a bygone age. Over the years our waterways have been starved of resources, saddled with debts and unable to develop their full potential. Now British Waterways can start to achieve that potential."
Bernard Henderson, British Waterways chairman, added: "We are delighted the Government shares our belief in their future and our desire to achieve much more for them." He said that by working in partnership with councils and private companies it would be able to restore the waterways and encourage greater leisure activities.
Canals currently carry 3 million tonnes of freight a year, including a large contract to supply coal to Ferrybridge power station on the Aire and Calder canal, west Yorkshire. In its heyday, before the advent of the steam locomotive, the network carried 30 million tonnes of freight a year.
British Waterways said it would work with local authorities to apply for grants to develop certain stretches of canal in inner cities as commuter links to encourage car drivers to use their bikes along towpaths instead. But it stressed its main focus was on leisure uses, such as walking and fishing. Britain's canal and waterways are regularly used by 10 million visitors a year.
Mr Henderson said: "The inland waterways already benefit the lives and work of millions, but their rich potential has been limited by underfunding."
He said British Waterways was also looking at developing a National Trust- style membership organisation.
Half of the population lives within five miles of an inland waterway. Birmingham is known as "Venice of the North" because of its network. Manchester's canals featured in a popular advert for Boddingtons, a local beer, which featured a Venetian gondola.