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An optimization algorithm with recourse to a nonlinear programming technique based on the interior penalty function with Davidon-Fletcher-Powell method, incorporating the graph theoretic approach for analysis of networks, has been developed for design of functional and least-cost water distribution systems with multiple reservoirs. The model has the capability to design a new system as well as to reorganize an existing system. Reorganization of a system becomes necessary due to increased water demand resulting from an increase in population density and enhanced service levels or expansion to the new areas. Further, the hydraulic simulator based on graph theory enables design of all types of systems; viz branched, looped or a combination thereof including nodes with specified fixed energy grades. The software package has been developed for use on an IBM-PC compatible microcomputer. The efficacy of the algorithm has been demonstrated through an example on design of a typical water distribution system.