There is an important posting on the Junkfood Science blog concerning hyponatremic seizures resulting from infants being given water to drink. This can also occur if infants are fed diluted infant formula. In short, inadequate sodium levels cause hyponatremia, which in turn leads to an osmotic shift of water from the plasma into cells (such as brain cells) and finally symptoms such as nausea, vomiting, diarrhea, etc. It can also happen in adults (causing confusion and coma), but infants are particularly susceptible.
There is a concern that with increasing food prices, poor mothers may try to stretch infant formula by watering it down. This is certainly not the right thing to do.
Breast milk is the best option for infants. If mother's cannot breastfeed their infants, infant formula is the next best option. Food companies put a great deal of research into making infant formula as close to breast milk as possible. The science in this area has progressed a great deal in recent years, but it is important to use infant formula as directed. After all for that important period, infant formula will be the only nutrition the child will consume.
Taking the discussion a little further, cow's milk is not appropriate for infants either. The composition of cow's milk and mother's milk is significantly different. This is something that was not fully realized a generation or so ago.