TAP water in Merseyside and Cheshire remains some of the most polluted in the country, despite improving for the 10th successive year.
United Utilities, which has almost 7m customers in the North West, has been told to do more to reduce bacteria in its supply and investigate breaches of regulations more thoroughly.
The company accounted for more than half the UK test failures for the presence of certain bacteria at its treatment plants.
It comes at a time when United Utilities has warned customers that water bills will have to go up to pay for a major investment programme.
The Drinking Water Inspectorate (DWI) today publishes its 14th annual report into the quality of drinking water across the UK.
It also assesses the performances of the 26 private water companies which run the industry.
Tap water quality in the North West has improved again with 99.82% of tests meeting national and EU standards. It compares with a national figure of 99.88%.
But the watchdog said there was still significant progress to be made.
United Utilities was one of just two to be rated "significantly below average" for the overall quality of its water. It got a similar rating for its overall performance.
Claire Jackson, DWI inspector for the North West, said: "People in Merseyside and Cheshire should still be very confident in their water supply. It is excellent.
"But United Utilities started in 1989 from a very low base because of historic problems with the pipes system, and they are not yet up to the average.
"Of most concern are the incidences of discoloration. I would certainly not want to drink water like that. There have been a lot of problems historically on Merseyside, a lot of problems on the Wirral.
"My response to the company is get your act together and get moving.
"It is not acceptable for people to have discoloured water."
Earlier this year, thousands of householders on Merseyside had brown water for two days after work disturbed sediment in old pipes.
United Utilities last night said the local water supply was at its best ever.
Frank White, head of drinking water quality, said: "The key point for us is that the water quality is the best it has ever been.
"A quality rating of 99.82% is something we're proud off but we don't wish to be complacent, there is room for improvement.
"We are upgrading 80 water treatment works and replacing 4,000km of water mains before the end of 2005, as well as working with the regulator to draw up our investment programme up to 2010.
"These improvements are what our customers help to pay for."
Inspector Jackson said one of the key areas where United Utilities needed to improve was in investigating cases where water quality failed tests.
She said: "We are bringing more enforcement orders which will make the company investigate these breaches much more thoroughly."
One of the most startling statistics for the company related to tests for bacteria (generally harmless) called total coliforms and faecal coliforms.
In 2003 there were 155 cases where total coliform levels were unacceptable at UK treatment plants, and 81 of those were at United Utilities plants.
For faecal coliforms, tests were failed 27 times across the UK, 15 of those by the North West firm.
The infrastructure is one of the main reasons for the company's below average performance.
Much of the work has been in removing lead pipes or giving them new linings.
Inspector Jackson said: "A lot of the problems do relate to the historic pipes system and the soft water type which they have to treat can also give rise to problems."
Nationally, the figure for test compliance stands at the highest ever level.
The Chief Inspector of Drinking Water, Professor Jeni Colbourne, said: "This improvement has only been brought about by major investment since 1990.
"But consumer expectations are higher than ever and more needs to be done to maintain consumers' confidence in their tap water."