blocky pattern on water/ground - how to get rid of it?

[Lagarto]

Does anyone know what causes the blocky pattern seen in the attached pics, and how to get rid of it? I've been fiddling with conf.ini and NVIDIA settings but no luck.

Here's the OpenGL section:

[Render_OpenGL]
TexQual=3
TexMipFilter=3
TexCompress=0
TexFlags.UseDither=1
TexFlags.UseAlpha=0
TexFlags.UseIndex=0
TexFlags.PolygonStipple=0
TexFlags.UseClampedSprites=0
TexFlags.DrawLandByTriangles=1
TexFlags.UseVertexArrays=1
TexFlags.DisableAPIExtensions=0
TexFlags.ARBMultitextureExt=1
TexFlags.TexEnvCombineExt=1
TexFlags.SecondaryColorExt=1
TexFlags.VertexArrayExt=1
TexFlags.ClipHintExt=1
TexFlags.UsePaletteExt=1
TexFlags.TexAnisotropicExt=1
TexFlags.TexCompressARBExt=0

TexFlags.TexEnvCombine4NV=1
TexFlags.TexEnvCombineDot3=1
TexFlags.DepthClampNV=1
TexFlags.SeparateSpecular=1
TexFlags.TextureShaderNV=1

HardwareShaders=1

Shadows=2
Specular=2
SpecularLight=2
DiffuseLight=2
DynamicalLights=1
MeshDetail=2
VisibilityDistance=3

Sky=2
Forest=3
LandShading=3
LandDetails=2

LandGeom=3
TexLarge=1
TexLandQual=3
TexLandLarge=1

VideoSetupId=17
Water=2
Effects=1
ForceShaders1x=0

PolygonOffsetFactor=-0.15
PolygonOffsetUnits=-3.0