Rural water systems (RWS) are commonly used to provide water to households for domestic uses (drinking, cleaning, washing, and sanitation) in developing countries. Water supply practitioners often classify these systems as single-use water systems (SUS) or multiple-use water systems (MUS). Smallholder farming communities in rural western hills of Nepal typically use such systems for both domestic and income-generating productive activities (e.g., agriculture, livestock, dairy, bio-gas, Rakshi), regardless of whether they were designed for single or multiple water uses. Therefore, this research frames both systems as providing multiple-use water services that enhance the productive activity and livelihoods of small- holders. Little is known on the factors that influence the productive activity of households in the western middle hills of Nepal and the impact these activities have on the technical performance of water systems (measured by duration of system breakdowns). This research identifies the extent of water-related productive activities in rural Nepali households supported by single-use water systems (SUS) vs. multiple-use water systems (MUS), and explores the factors that enables households to engage in high-levels of productive activity. The vast majority of households were found to engage in small-scale productive activities no matter what the rural water systems were designed to support, and more than half of them earned an income from water-based activities. Households engaged in high-levels of productive activity farm as a primary occupation, use productive technologies, are motivated to pursue productive activities, have received water-related productive activity training, and have received external support related to productive activities. A multinomial regression was used to predict the factors associated with high levels of productive activities undertaken by small farms. A hierarchical regression model was then used to examine both household- and system-level variables that contribute to the breakdown of rural water systems, focusing on the duration of breakdowns. The predictors of water system breakdowns include social factors (household involvement in decision-making during water system planning and construction and a household's sense of ownership toward the water system), technical factors (the management capacity of the water user committee and activity level of the system operator), economic factors (income earned from water-based productive activities), and geographic factors (the distance from the village to the water source). Finally, a conceptual model was developed to help identify strategies for implementing and scaling-up MUS. Scaling-up strategies for MUS begin with community participation in lo- cal government planning and budgeting. Under a new Constitution that went into effect in January 2017, newly formed local governments are to be provided with the funding and budget authority to determine local service priorities and how these services will be funded, designed, and implemented. The scaling-up of MUS would require local government officials, water system users, and private actors to develop the technical and institutional capacity needed to build and manage MUS, including the many support services needed by small- holder growers to realize its benefits. This research also examines the potential approaches that could enable subsistence farmers to become viable commercial producers. While growers are typically risk-adverse producers, this research identifies the mediating factors that could expand the long-term engagement of these producers in commercial agricultural production. These factors include adequate access to year-round irrigation, the use of improved production technologies and practices, improved access to rural markets, and improved production skills. The findings of this research will also be of value to Governmental, Non-Governmental Organizations (NGOs) and private sector actors who are looking to effectively mobilize their resources and expertise in support of smallholder farming in the hills of Nepal. / Doctor of Philosophy / A vast majority of farmers in the western middle hills of Nepal are smallholders who often use family labor and follow traditional agricultural and water use practices. They have been traditionally using rural water systems to meet their multiple water needs alongside domes- tic uses (drinking, cleaning, washing, and sanitation). There is growing interest for these systems to also be used for small-scale productive activities such as growing vegetables and livestock production. Evidence shows that these activities are an important source of income for farming families. However, little is known on the conditions that are needed to expand these activities and improve livelihoods. This research identifies the conditions under which rural water systems can become productive and technically sound, and outlines the strategies that can be deployed to scale-up productive activities. The research examines a broad range of perspectives (from rural farmers to development experts) on the limited commercialization of rural agriculture in the rural middle hills of Nepal and the potential approaches to promoting agricultural growth and commercialization among small landholders. The substance farmers were found to require both the means and motivation (i.e., extensive support services such as access to markets, input suppliers, irrigation and agricultural technologies, and production training) to become commercial farmers. Second, more than 90% of households were engaged in small-scale water-based production activities and more than half of them earned an income from these activities. The research revealed the conditions that enabled these households to engage in high levels of productive activities. Further, the factors that affect water system breakdowns were investigated. Since farmers are engaged in small-scale production, the interlinkages between productive income and system performance were examined. Finally, the research explores how multiple-use water services have the potential to be scaled-up in the middle hills of Nepal and beyond. Successful scaling-up strategies begin with community participation in local government planning and budgeting. This activity needs to be supported by substantial capacity building among government officials, water system users, and private actors on the factors needed to expand the productive use of water. Broad implementation of multiple-use water systems also requires careful documentation and dissemination of their benefits to key state and non-state actors. The results from this research can be used to identify appropriate households, communities, and water systems for programs focused on expanding water and agricultural productivity. Therefore, this research will have important implications for the Nepali government with regards to what policy, capacity development, and institutional arrangements need to be addressed to implement productive and sustainable rural water systems. This research can also be of special interest to Non-Governmental Organisations (NGOs) and private sector actors looking to effectively mobilize their resources and expertise relating to a smallholder farming in Nepal.