The August 2005 cable said the incident is a "prime example of failed diplomacy," CBC reported.
The issue involved moving water from Devils Lake in North Dakota into Manitoba's watershed via the Red River. North Dakota spent some $25 million building an outlet to reroute the water to prevent flooding in the region.
Canadian officials balked at the idea, saying, among other things, the water could be contaminated with unwanted organisms.
A similar leaked cable, written in May 2005, shows the behind-the-scenes acrimony between the United States and Canada over the issue.
"The U.S. and Canada are clearly on a collision course over Devils Lake, one that could have been avoided in a number of ways over the past two years," then U.S. diplomat John Dickson wrote.
The Canadian at the center of the issue in 2005, former Manitoba Premier Gary Doer, is now Canada's ambassador in Washington.
"The angry rhetoric and intransigence of the provincial government in Manitoba … has served to harden the attitude in North Dakota," Dickson wrote.
A U.S. State Department spokesperson declined comment on the cables, but said the situation has improved significantly in the six years since they were written.