Of 4,778 monitoring sites for underground water nationwide, about 60 percent recorded poor or extremely poor water quality.
Among 31 large freshwater lakes across the nation, 17 were moderately or lightly polluted.
Dianchi Lake in southwest China's Yunnan Province was seriously polluted.
In addition, a large number of lakes including Poyang and Dongting, China's largest freshwater lakes, are shrinking significantly, according to the report.
Chinese authorities released a joint plan last year on water conservation of Chinese lakes with relatively good water quality in a program lasting to 2020.
Among the nine major bays in China, the Liaodong, Bohai and Jiaozhou bays had poor water quality, and the mouth of the Minjiang River and Hangzhou Bay was of extremely poor water quality.
More than 300 cities in China suffer from water shortages, some at serious level, according to UN-Habitat, the United Nations agency for human settlements and sustainable urban development.
"The contradiction between supply and demand of water resources in China will get more acute with the intensified effect of social and economic development and climate change," said Chen Ming, a deputy director with the Ministry of Water Resources.
Chen said there is an annual water shortage of more than 50 billion cubic meters in China, with consumption reaching nearly 620 billion cubic meters a year nationwide.
"With the population expansion and economic development along river basins, particularly the development of tourism, mining and fish breeding and poultry raising industries and urbanization, the pressure on water conservation is growing," said Zheng Binghui, deputy director of the Chinese Research Academy of Environmental Sciences.
Villagers in Xiaozhuzhuang Village in Cangxian County, Hebei Province, were in panic after they found the water pumped from underground had a strong smell and showed iron oxide red color, Xinhua news agency reported on Tuesday.
Several hundred chickens died after drinking the water, local residents said.
New chemical plants discharged pollutants into rivers and dumped waste into nearby ditches, according to Xinhua.
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