"It is a grim situation and there is no point in pretending to Australia otherwise. We must all hope and pray there is rain," Howard told a news conference at Parliament House in Canberra.

Parts of Australia have been in the grip of drought for a decade and the dry is expected to wipe up to one percent off the A$940 billion (US$789 billion) economy in 2006-07. h Howard said there would be enough water for basic human consumption in cities, as well as towns along the critical food bowl of the Murray-Darling River basin.

The basin covers an area the size of France and Spain and accounts for 41 percent of Australia's agriculture.

"This is very much in the lap of the gods," Howard said.

Australians could face major food price rises if no water is allocated to Murray-Darling Basin farmers, irrigators warned.

The country's worst drought in 100 years, which began in 2002, eased and then reappeared in 2006, and has already severely reduced production of major irrigated crops.

Cotton lint production has plummeted to 250,000 tonnes in 2006/07 from 597,000 tonnes the year before, and from 819,000 tonnes worth almost A$2 billion in 2000/01, before the drought.

Drought has also been affecting Australia's wine grape production, which is estimated to be down by 30 percent in 2007 to 1.3 million tonnes, the smallest harvest since 2000.

Rice production has also collapsed, to 106,000 tonnes in 2006/07 from 1.6 million tonnes before the current dry season.

Australia may not have a rice crop at all this season if it gets no irrigation allocations, Laurie Arthur, president of the Ricegrowers Association, told Reuters.

"If it stays dry there will potentially be catastrophic losses," he said. Murray Valley irrigators had no water allocations last year, with dairy farmers hit especially hard.

Part of Australia's southeast has received recent rains, lowering the amount of land assessed as severely drought-hit. At the same time the country's desert outback is awash in rare floodwaters from the tropical north.

The March end of the El Nino Pacific Ocean weather pattern which brings severe drought to Australia's populated east has also heartened farmers.

But Environment Minister Malcolm Turnbull, charged with reforming the water system at a cost of A$10 billion, said even normal winter rains in coming months would not be enough. "We need big rain to make a difference," he said.

Howard said he did not want to talk in "apocalyptic terms" about whether some towns may run out of water completely.