Quote from site: "The cause of water on the knee is usually arthritis. When patients have knee arthritis, fluid accumulation within the joint is a common finding. Patients often find relief when the fluid is removed from the joint, but the fluid can often reaccumulate. Traumatic injuries can also cause accumulation of either fluid or blood within the joint. For example, meniscus tears and ligament injuries can cause fluid to collect. Furthermore, tearing of small blood vessels can cause fluid to accumulate within the knee, this is commonly seen in patients with an ACL tear." Here's more information: orthopedics.about.com
