I have been working on a similar setup for a while now. My first attempt was with a capacitive sensor, using the circuit from here:
http://njhurst.com/electronics/watersensor/. This however had some serious drift issues, and I also found that it was susceptible to radio interference - possibly because I did not have the circuit close enough to the sensor.
I therefore decided to use a pressure based approach. This was the same method used in a Silicon Chip project a few years ago. They used this sensor:
http://au.element14.com/jsp/search/productdetail.jsp?sku=1608910, which I also elected to use. I see Farnell also have some cheaper sensors, which may be suitable. The Silicon Chip article suggested two sensing methods: using an air-filled dip tube (which will have issues with temperature compensation), or submerging the entire sensor assembly in the tank. The second method will have greater accuracy, but requires extra work in waterproofing the sensor.
Instead of these methods, I decided to mount the sensor externally, connected through a sensing port at the bottom of the tank. This gives a proper pressure reading without needing to waterproof the sensor. Note that the outlet used should be dedicated to the sensor, as any inflow or outflow through the port used will upset the reading.
While the datasheet for the sensor says that it is only suitable for sensing air, the sensor die is potted in silicone, so I can't see how clean water would damage it. I left a small amount of air in the pipe to isolate the sensor from the water, though this may dissolve eventually. This small volume of air should not affect accuracy with temperature variations, provided that there is a reasonable length of pipe running horizontally out of the sensor.
My installation has only been running for a couple of weeks though, so I cannot comment on the long-term reliability of this arrangement.
One other good level sensing solution is a magnetostrictive linear position sensor, with a toroidal floating magnet around the sensing rod. Unfortunately, these are quite expensive.