The effects of water chemical composition on granular sludge formation in a denitrifying USB reactor was studied. The mineral fraction and sludge volume index (SVI) of the granular sludge in the reactor were found to be closely related to the composition of the influent water. Groundwater and simulated ‘hard’ water produced granules with good settling characteristics and high reactor VSS concentrations. Sludge granules from the reactor fed with surface water, which had lower concentrations of calcium and alkalinity, had a low mineral content and high SVI values resulting in biomass washout and reactor instability. The mineralization process, as expressed by the sludge's ash content (mainly CaCO3), is due to an increase in the pH and alkalinity during denitrification thereby changing the reactor's precipitation potential.