(Eventually this item will be folded into my "PH Opinions: Spells" article, if it ever gets written.)
The question came up on my message boards a while ago, and I thought I'd repost it as an article so it wouldn't get lost.
Question: If you're under the effects of water breathing, can you cast spells underwater?
Answer:The Sage's official answer is that the spell only lets you breathe, and doesn't make it possible for you to vocalize properly while breathing water--you would need the Silent Spell feat, a necklace of adaptation, or something else like that.
That's unfortunate, since it turns water breathing into the "well, I don't have to worry about drowning but now I'm a useless spellcaster underwater" spell. Because of this, I would let a spellcaster cast spells while using water breathing.
But the fighter and rogue need freedom of movement to function fully underwater, you say? True, but they can at least perform their primary function underwater to a limited extent with just water breathing ... while spellcasters need water breathing and something else to perform their primary function at all.
However, I'll admit that speaking with your lungs full of water, even if you're able to breathe water because of magic, probably isn't easy.
I wouldn't make it a feat, as this isn't a "you either know how to do this or you don't" situation.
I wouldn't make it a spell failure chance because that would imply that you could never get better with practice (and also brings up the weird situation where divine spellcasters are suffering spell failure).
I'd probably make it a Concentration check, DC 10 + spell level. Not too difficult, but trouble enough for the more complex spells. I also wouldn't let you take 10 on that check, as even in the most relaxed situations an air-breather should find it distracting to try to enunciate properly when breathing water.
Water-breathers, of course, wouldn't have to make this roll when casting in water, but if they don't also have the ability to breathe air they should make such a check when using an air breathing spell.