I posted a topic about this over a year ago, but now that we're getting advanced shaders, I feel this may be possible.
This would probably be ridiculously complex, and I don't know if it's something Torque is even capable of. Basically, water that isn't transparent, undulating bricks. More specifically, has a fog effect, getting more opaque the thicker a body of water is; more transparent when viewed straight-on, more reflective when viewed at an angle; and refraction. If you don't know what I'm getting at, look at the water in Half-Life 2. The game's already six years old, but it was one of the first games to have water that actually looks like water, and it looks great.
Edit: I forgot to add that if this IS possible, there would be options if you want this effect to apply not at all, to map water, or to all water (including water bricks).
Also:
I think the water's fine the way it is.
The studs on the water match the feel of Blockland. Kompressor is removing the interiors and terrain, and someone said that both of those didn't match the feel of Blockland very well anyway, which I'm willing to agree with. Realistic water sounds like something that would also tear up the Blockland feel.
Water is water. I'm cool if everything solid has to look like it's made of plastic, but water should actually look like water. If water is to look like bricks, then where do we stop? Do we make fire blocky too?!