The connection between forest and watershed has been well studied in the field of forestry science. However, the social facet of this field is yet to be thoroughly understood and studied. In Nepal, community forestry is playing a crucial role in maintaining the health of watersheds which act as a crucial source of water in the mid hills. Managing these watersheds and rivers is fundamental towards providing quality water to the community. Despite a growing body of knowledge on forest and water, the needs and concerns of managing these resources remain largely unaddressed. An important question then to emerge from this is - can community that is effectively managing forests, manage the water resources emerging from the forests? This thesis aims to investigate opportunities and challenges of water management in community forestry system. Specifically, it analyses whether and how water in the community forests is being managed at present. The study was designed using a mixed methods approach of qualitative and quantitative research. Qualitative data collection included a questionnaire survey (99 completed the questionnaire), conducting semi-structured interviews (20 interviews), attending community workshops and initiating informal discussions. The quantitative data collection also involved conducting a water quality analysis on two water streams within the Lamtar catchment. The analysis of the data indicated that the community manages water in Lamatar in a number of different ways, and with some hierarchies and different roles affecting access. User groups manage water on a small scale providing water to the community. However, within community forestry, water management is not a prime responsibility. This is because a) there is no legislation to require water management within community forestry, b) no concrete knowledge as to how water management can be done through community forestry; c) unlike other forest products such as timber, herbs, fodder, water does not belong to the FUGs, it belongs to the state, and d) there is no legislative or institutional linkage between forest and water. This thesis emphasises that iii community forestry users manage water on a small scale and informally-based on local norms, but they do not have legislative support or ownership for management to do so. This is leading to issues of inadequate water supply and water quality. There is a need for coordinated policy for integrated natural resource management to enhance sustainable resource conservation.