Britain's rivers, some of which were little better than sewers a generation ago, are now at their cleanest for more than a century.

In the past decade, our waterways have returned to conditions not seen since before the industrial revolution, the Environment Agency says.

Water quality has improved so much in some places that a number of wildlife species are returning to watercourses from which they had vanished, including salmon, otters and water voles. Figures show that water quality has improved year on year for the past two decades, and serious water pollution incidents have more than halved since 2001, according to the agency.

Meanwhile, the river Thames, which half a century ago was declared "biologically dead" at Tower Bridge in London, won a coveted international prize this year for its environmental value.

"The last decade shows how far we've come in reducing pollution and improving water quality and river habitats," said Ian Barker, the agency's head of water. "Rivers in England and Wales are at their healthiest for over a century, with otters, salmon and other wildlife returning to many rivers in record numbers in locations across the country." The agency's claims need to be qualified, because by other, European, standards which are tougher, a majority of our rivers still have a long away to go.

But there is no doubt that the picture of solid improvement painted by the agency in an end-of-year review is a genuine one. A generation ago many British rivers were little better than foul-smelling drains. Such channels of untreated pollution are now largely a thing of the past, thanks to policing by the agency and investment by water companies (and also to the fact that most of Britain's heavy, old-fashioned smokestack industry, once the major pollution source, has disappeared).

As a result, water cleanliness has improved everywhere, and even rivers associated with great cities, such as the Thames in London, the Mersey in Merseyside and Greater Manchester, and the Tyne in Newcastle, are seeing a major resurgence of life.

This year the Thames beat hundreds of other rivers across the world to win the International Theiss River Prize, which celebrates outstanding achievement in river management and restoration. The prize recognised the astonishing transformation which the river has undergone, especially since the introduction of treatment for London's sewage, which once was dumped raw into the river.

Whereas a 1958 survey at Tower Bridge found no fish in the river, the Thames is now home to at least 125 different fish species, including smelt and shad – while its estuary supports shellfisheries and is a nursery for commercial sole and bass stocks.

The river is now clean enough for salmon to swim up (although 30 years of effort have not yet succeeded in producing the Thames's own self-sustaining salmon population). Once polluted tributaries, such as the river Wandle in the heart of London, are now so clean that they can support brown trout.

The Mersey, which once was also biologically dead, now also has a run of salmon and sea trout, while the river Tyne is now the most productive salmon river in England. July this year saw a record month for levels of Tyne sea trout and salmon, with 9,240 counted – the highest since records began.

The widespread return of the otter, which had undergone a catastrophic population decline because of pesticide pollution, is also evidence of rising river water quality. The number of sites with evidence of otter life has risen tenfold in 30 years, with records increasing from 5.8 per cent in 1977-79 to 58.8 per cent in 2009-10. In the South-west and the river Wye catchment, otter populations have probably reached maximum capacity, with those in Northumbria, Cumbria, Wessex and the upper Severn close to that, and Kent being the only county in England where no otters have yet returned.

Otter recovery is spreading towards the South-east from traditional strongholds in the north and South-west, and it is predicted that the population will spread to Kent within the next 10 years, the agency says.

There is also encouraging news about the water vole, immortalised as Ratty in The Wind in the Willows. The animals were once a common sight on waterways across the UK but in the 1990s their populations began to decline dramatically, until 90 per cent had disappeared, making them the fastest declining mammal in the UK. However, the water vole is also making a welcome comeback, and, earlier this year, a survey discovered 30 locations where the mammal is regrouping

The agency's claims should be qualified, however, by the fact that its yardstick is the level of chemical pollutants found in the water, and this has indeed steadily declined year on year. But there is another way of measuring river health, which is how much life in total exists in the river (such as invertebrates, fish and plants) compared to what would be expected in a pristine state – in other words, its ecological as opposed to its chemical quality.

A new European law, the Water Framework Directive, will make ecological quality the new benchmark, and from 2015 Britain's rivers will be expected to be of "good" ecological quality. Yet, at the moment, only 26 per cent of rivers in England and Wales hit that target, with 56 per cent of "moderate" quality, 14 per cent "poor" and 2 per cent "bad".

Case study: 'Dead' waterway where 100 fish species now live

The restoration of the river Thames has been a remarkable achievement, at last properly recognised with the International Theiss River Prize in October.

For nearly 150 years the river was dead; its dying began at the end of the Napoleonic wars, when the introduction of the water closet meant that raw sewage was dumped into the river, and the advent of gas lighting in the capital meant the pollution residues from gasworks went into the river too. It was an excellent salmon river, but the last free-run Thames salmon was caught in 1833.

The river remained lifeless and filthy until, in the 1950s and 1960s, the two enormous sewage outlets, at Crossness and Beckton in the Thames estuary, which were pouring thousands of gallons of untreated filth into the river every day, began to be cleaned up. The water quality improved dramatically and, on 12 November 1974, the amazing happened – a 9lb (4kg) female salmon was found in the intake screens of West Thurrock power station. It was so surprising that it was sent to the British Museum for positive identification.