The water flask is a relic of the vaults. In Fallout the Vault Dweller is given three flasks if the Outdoorsman skill is tagged. At the beginning of Fallout 2 the Chosen One is given a flask from Vault 13, to assist in their search for the G.E.C.K. It is worth $25 in the first game.
The flask has the simple property of preventing dehydrating random encounters from occurring. A large number of flasks (46 in the footlockers) can be found on the third floor of Vault 13 in the Vault's water supply, but few outside of the Vault. The water guard carries 3 extra water flasks.
In the second game, the Chosen One can ask Vic where he got the flask, which leads to them being directed to Vault City to see Ed the brahmin dealer for further information. Showing Ed the Vault 13 flask will put the Den, Modoc, Broken Hills, Redding, and New Reno on the world map, and grant 500 XP.
Water flasks are less common in Fallout 2; with one being given to the Chosen One before they leave on their quest and a small number being found in Vic's shack, but outside of the main quest they serve little purpose.
Fallout: New Vegas
The canteen's primary function is to help stave off dehydration in hardcore mode but it also regenerates a small amount of health in both normal and hardcore. However, it cannot be used as the only source of water to stay hydrated.