The Water Candle is an item found on shelves in Dungeons, and is a recolored version of the Candle. They can be removed with a pickaxe or by right clicking.
When the Water Candle is placed on a surface, the monsterspawn rate and total amount of monsters allowed to spawn in the world are both greatly increased. This makes it effective for players who want to farm for mob drops such as Doctor Bones or Tim, or for those who wish to increase their chances of summoning the King Slime.
If the player is underwater, they are still able to hold the candle and the effect still works.
Water candles have the same blue light effect as a blue torch.
The enemy increasing effect has a 48-block square radius range.
Multiple Water Candles will not increase the spawn rate because one candle adds the effect "Water Candle".
Simply holding the Water Candle will no longer inflict the debuff on a player, assumedly not having any effect on spawn rate or monster limit.
A Debuff icon will appear whenever a player is within range of a placed Water Candle.
Prior to the 1.0.3 update there was a bug where the Water Candle had no effect. Instead, the Band of Regeneration had the wanted effect. Since the tile ID of the Water Candle is the same as the item ID of the Band of Regeneration, it is likely that the game developers confused tile and item ID.
When wearing a Robe and holding the Water Candle, the leg animation doesn't work, making it look like the player is floating.
The Candle and water candle have the same size and shape, just different colors.