It has been a common practice to dilute milk with water. This has been mostly done to reduce the fat content. But you should understand that it dilutes all the other nutrients too. So the quality of milk reduces and you do not get the health benefits. It is better to buy skimmed milk or milk with 0.5% fat in which the other nutrients will be remain intact. Skimmed milk can even be done at home by boiling and refrigerating the milk and then skimming of the fat the next morning.
Do not ever give diluted milk to children after the age of one. Before the age of one, they should be breast fed. In fact, they need full fat milk for good brain development and for optimum growth.