Hi Surya,

If you are familiar with 8051, I would recommend that you should use the 89C2051 for even such small job. It offers you great flexibility and offers future modifications also.
Interestingly cost of using a pair of logic ICs and a uP is almost same, so why don't use uP.

I have done same project almost 16 years back, during college days. I used 8 wires, 7 used as an input and 1 connected to ground. they were connected directly to uP input and micro input was pulled high with a 47k resistor to +5v. Those seven wires were insulted but unshielded at the end for about 3mm, and were fixed in vertical order inside the water tank. It was a homemade hobbiest job. You can try it out.

If you want it to make it professionaly, you can use pressure sensor and fix it some where in the tank, according to the sensor manufacturers recommendation for your need. Amplify the signal with LM358 opAmp, A/D conversion and give the output to micro. Seems complicated but you can simplify it by trimming un-necessary steps.

Rauf