To get to the never-ending water level, play through most of world 1-2 and make sure that you have the Fire Power ability. At the part right near the end of the stage, just past the second series of elevator platforms, there's a pipe that leads above ground so that you can tag the level flag. Instead of entering the pipe, hop onto it and turn your attention to the overhead blocks. Break the second and third block away from the pipe, along the ceiling. It's important that one block remains unbroken, the one positioned right next to the pipe.