Water resource scarcity increases societal instability, poverty, and economic recession. Therefore, sound water resource management is vital to alleviating water crises in the agricultural, domestic, and industrial sectors. Southeast Iran, which currently lacks good water resource management, is experiencing a severe water crisis. Taking Zabol and Zahedan as examples, this paper seeks to optimize water allocation between the two cities using a dynamic bi-level programming model; the upper level objective minimizes the deviation between water demand and supply, and the lower level objective maximizes the net economic benefits in each sector. A sensitivity analysis is then conducted on the different sources of available water to provide more information on water allocation over time.