I will leave what I put just as a reminder to me to carefully read the original post.
I am figuring it might be the wires or connector more now. When you drain fuel does a decent bit come out or does it dribble?
I still figure the ford sites will do a good job of showing you the direction to head.
I figure you know the water in fuel light is for the fuel filter, diesel engines tend to have a spin on fuel filter in the engine bay. You can run a search for your year ford to learn exactly where it is and the recomended process for draining water out of it without making a mess.
With the age of your vehicle there is a chance it is also just a connector, so the search will let you learn the average lifespan of the wire sensor for this fuel filter.
I don't know these fords that well but they are well respected.
The water in fuel is a concern and if it is keeping the glow plugs from turning on it would explain the hard starting, my understanding is these older diesels are rather sensitive to the glow plugs working.
Lots of ford sites out there with lots of posts on this engine, so I am not going to guess on the specifics because it has been a long time since I looked at this specific setup.