The plan includes a massive overhaul of Australia's irrigation infrastructure, earmarking nearly $4.7 bn for the modernisation of pipes and channels along the Murray-Darling aimed at saving billions of litres of water each year.
The 10-point plan comes as Australia undergoes its worst drought in a century. Other investments include $1.2 bn to boost water efficiency on farms, and $2.3 bn to address over-allocation of water in the drought-ravaged Murray-Darling Basin.
The Murray-Darling system provides irrigation for 40 per cent of Australia's farm produce.
Howard said the states would have to agree to a turn over powers to the federal government before he would release the $7.8 bn in funding – and said such a move was required for the plan to work.
Opposition parties are seeking to build resistance to the plan, accusing Howard of failing to use available resources to address the water crisis, and looking to establish his environmental credentials before federal elections later this year.
Kevin Rudd, the Labour party leader, told the Australian Broadcasting Corporation: "We've had now for nearly three years a A$2 bn [$1.6 bn] Australian Water Fund. Seventy-five per cent of that has not been spent by Mr Howard.
"Now six months before an election, we have the announcement of another ... fund."