This study demonstrates that data envelopment analysis (DEA) can be a useful tool to assess the relative efficiencies of water supply systems and to establish benchmarks with which to measure progress in the management of water resources. Frontier efficiency models measure the efficiency of water use in the Palestinian Territories (West Bank and the Gaza Strip). At the municipality level, sufficient data for the years 1999–2002 were available to estimate efficiency and stability scores. The Gaza Strip efficiency scores were considerably lower than those of the West Bank. Water losses were the major source of the inefficiency as indicated by the large slacks of this input. The relative sizes of the municipalities affect efficiency scores little. Palestinian policy makers should focus on rebuilding the infrastructure of the water networks, beginning with the most DEA inefficient municipalities in order to minimize water losses.