Treated wastewater (TWW) reuse for agricultural irrigation is a well-established approach to coping with water shortages in semi-arid and arid environments. Recently, additional uses of TWW have emerged, including streamflow augmentation and aquatic ecosystem restoration. The purpose of the current study was to evaluate the water quality and fish health, in an artificial reservoir located in an arid climate (the Yeruham Reservoir, Israel), which regularly receives TWW and sporadic winter floods. The temporal distribution of water levels, nutrients and organic micropollutants (OMPs) were measured during the years 2013–2014. OMPs were also measured in sediment and fish tissues. Finally, the status of fish health was evaluated by histopathology. Water levels and quality were mainly influenced by seasonal processes such as floods and evaporation, and not by the discharge of TWW. Out of 16 tested OMPs, estrone, carbamazepine, diclofenac and bezafibrate were found in the reservoir water, but mostly at concentrations below the predicted no-effect concentration (PNEC) for fish. Concentrations of PCBs and dioxins in fish muscle and liver were much lower than the EU maximal permitted concentrations, and similar to concentrations that were found in food fish in Israel and Europe. In the histopathological analysis, there were no evident tissue abnormalities, and low to moderate infection levels of fish parasites were recorded. The results from the Yeruham Reservoir demonstrated a unique model for the mixture effect between TWW reuse and natural floods to support a unique stable and thriving ecosystem in a water reservoir located in an arid region. This type of reservoir can be widely used for recreation, education, and the social and economic development of a rural environment, such as has occurred in the Yeruham region.