posted 05-24-2015 07:25 AM ET (US)
In any alarm system which is signaling an alarm, there are three possible states that may have occurred:--the alarm system and its sensors are functioning normally and there is an actual alarm condition;
--there is a failed sensor and it is signaling an alarm condition when there actually is none; or
--the sensors are all working properly but the main electronic system of the alarm has failed and it is signaling an alarm condition when there actually is none.
Since you seem confident that no water is in the fuel, we rule out the first situation. The second situation seems likely.
There must be some sort of sensor that is intended to detect the presence of water in the fuel. I am not familiar with the details of your Mercury engine's system, but the sensor could be something as simple as two electrodes that immerse in a reservoir of fuel and measure the resistance between the electrodes; the water would be detected because it would create a difference resistance than gasoline. The fault could be due to something as simple as the two electrodes being mechanically bent so they come in contact.
Locate the sensor and inspect it. Try to make an electrical measurement of the electrical signal being sent by the sensor. If the sensor has failed so it sends a persistent alarm signal, then you can remedy the problem by repairing or replacing the sensor. If the sensor is not persistently sending an alarm signal, then you can suspect the main electronic component of the alarm system as being the cause.