Abstract: With the development of the economy and society, human beings have a strong ability to transform the structure and function of the city water environment system. In addition to natural factors, the state of the water environment is a concentrated reflection of human pollution behavior and governance behavior. To analyze the effect of the city water environment, this study takes Taihu Basin as an example. Based on the PSR model, the water environment status of each city in the basin from 2010 to 2018 is measured and its spatial correlation is tested. The study focuses on using the Dubin model to analyze the impact of social and economic development factors on the city water environment and its spatial spillover effects. The results show that the water environmental status of cities in the Taihu basin has been improved in varying degrees from 2010 to 2018. The water environmental status of Jiaxing and Shanghai, which are located in the lower reaches of the basin, is worse than that of other cities. There is a positive spatial spillover effect in the water environment between cities, which shows the phenomenon of “sharing prosperity and loss”. Population agglomeration has a negative effect on the local water environment, while economic development and foreign direct investment have a significant positive effect. In terms of the impact on surrounding areas, the negative spillover effects of population agglomeration, technological innovation and cultivated land area are significant, while the construction land area and industrial agglomeration are positive spillovers. The development of industrial agglomeration of cities in the Taihu basin tends to be more mature, which can realize the coordinated development of the economy and environment. However, the non-point source pollution from agriculture is a non-negligible factor restricting the improvement of the water environment. Finally, according to the results of the study, some policy recommendations for the improvement of the city water environment are put forward, such as strengthening cross-regional cooperative governance, guiding the city’s land developed efficiently and intensively, and improving rural water environment governance.