Sensor for underground water tank level
http://playground.arduino.cc/Main/Waterlevel

The above link had a nice approach.



The principle is the same as traditional pneumatic level gauge, excepted that the dial indicator is replaced by a pressure transducer, and the manually-operated pump is replaced by an aquarium air pump.

When the pump is on, air flows through the weighted PVC pipe to the bottom of the tank, where bubbles appear. At this moment, the air pressure in the PVC pipe is equal to the hydrostatic pressure at the bottom of the tank. As the water pressure at the bottom of the tank is directly proportional to the water level, the same goes for the air pressure in the PVC tube. The air pressure is then converted to an analog voltage by the pressure transducer. This voltage can be read easily by the arduino.

A big advantage of this method with regards to other existing techniques is that no electronic or metallic parts needs to be placed in the tank, where the environmental conditions (mainly humidity) are not favorable. This avoids any risk of corrosion.