I went through the entire game without collecting any water (except a specific container for 1 quest). So I don't think that's your problem.
My guess is that perhaps the rest calculation requires a certain amount of 'food points' to work. If you have less than the required amount it fails to run.
This is not very realistic of course - you would expect to be able to heal a small amount if you had just one apple or whatever. But it may not have been programmed that way.
There are also rather a lot of minor bugs and unsorted loose ends in BD, so it may be that you picked up a loaf that somehow had no food value assigned to it, or which failed to trigger the internal calculation.
Sometimes dropping something and picking it up again can 'reset' the game calculations too. There's at least one spot where the NPC refuses to acknowledge that you are carrying the required item, but if you wander away, drop it and pick it up again, it will then work.
I think that somewhere in the game there is the opportunity to get a healing spell too, which can replace the need to rest.
I found that I rested a fair bit in the early part of the game, but as I got stronger, smarter and better equipped, the occasional potion or short period of standing still was enough.
Good luck. No fun being hungry... <img src="/ubbthreads/images/graemlins/smile.gif" alt="" />
