I drafted a design for a water level indicator a while back, but never got around to actually build it. The plan was to use a low pressure sensor (say 0-1 psi full scale) and mount the sensor to one end of a pipe (plastic tube). The other end of the pipe is open and goes into the tank. When water level rises, the air column trapped inside the pipe will get compressed and so pressure will increase. The pressure (relative to open air) will be proportional to water level.
Interesting. Would there be any concern about the air column slowly going into solution in the water over time, thereby changing the sensitivity? I have a laundry tub pump that works on the same principle, but the bottom of the sensing tube is out of the water every time the tub is pumped out.