Lower Hunter water restrictions will be eased to Level 1 from next Monday following good rainfall over the past week.
Combined storages were at 62.6 per cent on Tuesday morning, up 9.2 per cent from a month ago.
Level 2 restrictions, which limit outdoor watering to 15 minutes every second day, were introduced on January 20 after water levels storages dropped to 50 per cent.
Water Minister Melinda Pavey said the Chichester catchment had received good falls, generating streamflow in the Williams River and causing the Chichester Dam to spill.
"Although this is a positive step in our drought recovery, we are not out of the woods yet, which is why it's really important that we all continue to use water wisely and save it where we can," she said.
Hunter residents and businesses have reduced their water usage by 20 per cent since restrictions were introduced for the first time in 20 years last August.
The head of the state's water sector Jim Bentley told the Hunter Business Chamber last Friday that the water savings achieved as a result of water restrictions needed to become the new normal.
While acknowledging restrictions had the potential to have adverse social and economic impacts, Dr Bentley said helping individuals and businesses improve their water efficiency was fundamental to improved long-term water security.
"We are still using 15 per cent more than Melbourne. So we have to ask ourselves are the savings we have made just wastage that we should have been dealing with some time ago or have we gone to far?," Dr Bentley, who was managing director of Hunter Water until last year, said.
"People tell me there are differences between Sydney and Melbourne and of course there are but we need to understand what the right level should be and not just accept it is what it is."
Sydney will also return to Level 1 restrictions after dam levels bounced back to 80 per cent.
Level 1 restrictions mean residents and businesses cannot use standard sprinklers and watering systems, leave hoses running unattended, wash cars or buildings without a trigger nozzle or high pressure cleaner or clean paths, driveways and other paved areas with a hose.