The ability of a distributed fibre-optic chemical sensor to discriminate between different water potentials is assessed. The sensor utilises the swelling of a poly(ethylene oxide) based hydrogel coating on a GFRP support cable and a kevlar thread, to modulate the Rayleigh backscattering signal through quasi-sinusoidal distortions of fixed periodicity, on a multimode graded index optical fibre attached to it. The performance of xerogel poly(ethylene oxide) pieces was initially measured through equilibrium water uptake (EWU) studies using different NaCl solutions as an osmotic medium. The results were then compared with in situ OTDR studies of the sensor's behaviour. It was shown that the sensor was able to discriminate between a range of water potentials, and different concentrations of NaCl solutions at a resolution of 0.05 mol It^-1. The distributed nature of the sensor makes it particularly useful for a wide range of applications such as to monitor salinity and water quality in coastal areas. Alternatively, when the sensor is immersed in aqueous solutions containing mixtures of unknown species, it can provide distributed `surrogate' measurements which may be useful to the sample collection procedure usually linked with further analysis in a chemical laboratory. Preliminary observations from experiments with soils, have shown that it is possible to measure changes in soil water potential in the region of approximately -45 kPa. (6 pages)