Today after washing the mud of me defender i noticed a cable hanging down next to the Fuel Filter, Looks as if this has not been plugged into anything for a fair while, as it has a lot of corrosion on the terminals. I'm sure this should be plugged into something but cannot find any obvious places for it to go...... Could water be getting onto it and causing the Water in fuel filter warning light to come on? As it does it whilst driving along a wet road. I also drained the filter to see if there was any water in it and the was nothing.

Hope that makes sense.

Well does your filter housing have a blade for the terminal to plug into ?

Not that i could see... Could it be an incorrect housing?

Sounds like somebody has changed the fuel filter but not swapped over the water sensor when they did it. The sensor simply screws into the drain plug hole and replaces the drain plug at the bottom of the standard fuel filter.
If you dip the connector into a glass of water or if it gets wet enough to make an electrical circuit between the two wires it will think there is water in the fuel and light up the dashboard light.