Corrosive aluminium chloride was illegally discharged into the East Looe River in 2010 because of a fault at a sewage treatment works near Liskeard.
Hundreds of prized salmon and sea trout were later found dead in the river, although tests failed to prove the cause was the toxic spill.
The water company was fined £15,000 and ordered to pay the Environment Agency's £50,000 costs after a case heard at Plymouth Crown Court.
Rob Hocking, from the agency, said: "The toxic nature of aluminium chloride places a special responsibility upon water companies and other users of this chemical to ensure this chemical is handled and stored with great care.
"Every effort should be made to minimise the risk of it escaping into the environment."
The court heard that an agency officer visited Lodge Hill sewage treatment works on August 22, 2010, and was told by a member of staff there had been a chemical spill at the site.
The previous day, a member of South West Water staff went to check the level of aluminium chloride – a yellow corrosive liquid used to improve the quality of the final effluent before it leaves the works – and noticed a pipe had broken.
He turned off the valve and called for an engineer to fix the broken section.
Within 24 hours of the spill, the agency received reports of a fish kill in the East Looe River.
More than 300 sea trout, trout and salmon were found that day over a four-mile stretch downstream of the sewage treatment works.
Despite extensive analysis, tests and research, the agency could not prove what might have killed the fish.
At Lodge Hill, the chemical is pumped from a tank and into the sewage treatment process via a small pipe.
The storage tank is surrounded by a concrete bund – to minimise the risk of it escaping into the environment – with a sealed drainage system that feeds back into the works.
Months later, after examining the chemical storage area more closely, South West Water discovered it was possible for any spillage of the hazardous chemical outside of the bund to make its way, via a buried manhole, into the East Looe River.
The Environment Agency was then informed.
It is not known how much aluminium chloride – known as "Claral" and which is toxic to fish at particular concentrations – reached the river.
The court was told South West Water should have kept records of its use and the amount stored at the treatment works, but it didn't and failed to follow its own storage procedures.
South West Water, based in Exeter, was fined £15,000 and ordered to pay £50,000 costs after pleading guilty to an offence under the Environmental Permitting Regulations 2010. The case was heard on Wednesday.
A spokesman for the company said: "South West Water accepts responsibility and apologises for an accidental discharge from Lodge Hill sewage treatment works into the East Looe River in August 2010.
"We reported the discharge to the Environment Agency and took immediate steps to repair the faulty pipe.
"Following extensive investigations by experts for both parties it was agreed with the Environment Agency there was no conclusive evidence to link the discharge with environmental damage.
"The court in fact found that South West Water did not cause the fish to be killed and we have been sentenced on that basis."
