The ATI cards are still likely not capable of rendering in the method used in Water=3 and 4. That was a nVidia specific extension. I don't think they ever added it later in the ATI cards. It was never part of the standard DirectX 9.0 package so it was never supported by anyone except nVidia. Stupid I know.
Water=2 is nearly as good and renders far faster.
As for the Config.ini...no I don't see anything that'd make a big difference.
What I'd focus on is your Anisotropic Filtering and Anti-Aliasing settings. See how high you can set both of those while still maintaining a high FPS. These are not game settings...these need to be enabled in the Catalyst Control Centre. I haven't used it in years so I can't tell you what its all about but I imagine there are application specific settings just like in the nVidia Control Panel.
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