A methodology is presented for the optimal allocation of water resources in a region, considering the economic and hydrologic characteristics of the water resources system. In order to systematically represent the hydrologically interdependent regional water resources system the allocation problem is formulated and solved in an input-output framework. The optimization approach is one of iterative quadratic programming, capable of minimizing a concave objective function over a linear constraint set. For purposes of testing and illustration the methodology has been applied to the Cache la Poudre River basin in northern Colorado. Results from this application are briefly discussed.