I’m currently reading Arabian Nights and especially in some of the earlier stories (Lyons’ English translation), characters mix wine with water. Reminds me of similar things in Homer. Was that done to dilute the wine because it was strongly flavored (or maybe it tasted bad)? To reduce alcohol consumption? What? To try and disinfect iffy water?
I can speak a little as to the Byzantine side of things, which would also relate to the wine consumption in classical Greece and Rome since wine mixing didn't radically change too much between the two. If you want more reading on this, check out Chapter 4 (The one on wine) of Dalby's Tastes of Byzantium as well as Kislinger's short article "Being and Well-Being in Byzantium: The Case of Beverages."
If you'll look at my older post linked below, the Byzantines continued diluting their wines with water, pitch, resin, and plaster well into the 2nd millenium, a practice which was opposed to the palate of western Europe at least by the 10th century. These materials were used to help with the storage of wine in clay amphorae in ancient times. Mixtures of resin were used to waterproof the amphorae as well as prevent spoilage, but Greeks and Romans also enjoyed the flavor it added to wine.
Also, wine mixing was not done primarily to sanitize available fresh water or as an alternative to dirty water. Fresh water was actually very common in the Byzantine and Constantinopolitan diets. In fact, the fresh water of Constantinople had a reputation for a having a slightly salty taste
Drinking of mixed wine was also reinforced with cultural distaste for drinking unmixed wine. Undiluted wine was perceived as excessively strong and barbarian. To go way back, Herodotus gives a useful example in 6.84 of the Spartan king Cleomenes, who, as was said by the Spartans, went mad and died after taking up the custom of drinking unmixed wine from "barbarian" Scythians.
The Argives say this was the reason Cleomenes went mad and met an evil end; the Spartans themselves say that Cleomenes' madness arose from no divine agent, but that by consorting with Scythians he became a drinker of strong wine, and the madness came from this.
In later Byzantine literature though, there doesn't seem to be a strong belief that drinking unmixed wine would drive you insane, but it was still associated with excess. For example, Kislinger cites the "Book of the Eparch," a possibly 9th/10th century guide on running Constantinople, which notes that tavern owners at night had to put out the fires that were heating their pots. This was not done in any relation to cooking food, but instead preventing water from being boiled so that tavern owners couldn't over-dilute their wine and consequently keep their customers from getting too drunk. Kislinger cites this to say that because nobody alternatively attempted to prevent the drinking of outright unmixed wine, it doesn't seem to have been a conceivable idea for the Byzantine palate.
Unfortunately, I'm not fully aware of the the gradual shift toward unmixed wine consumption which is pretty universal today. Michael Psellos, an 11th century scholar, makes one reference to unmixed wine drinking without the usual derision, but that is the extent to which I'm aware of the trend. I can say that by the 16th century, we do see that many Greeks drank unmixed wine, according to a mention by the French author Pierre Belon, on a visit to Venetian Crete (Found in Tastes of Byzantium 89-90):
[The Greeks] all consider it bad to put water in their wine. Their present practice is to drink equally and by turns, especially the Cretans ... with frequent little sips of their strong malmsey ... It must be understood that the Greeks' tables are usually very low, and their custom is to drink as they sit, by turns, never getting out of sequence. If anyone asked for wine out of turn he would be considered rude. The quickest at pouring has the wine-jug and pours for all the company. The custom is to drink from a small glass without a stem, and to drink all that is poured out, not leaving a drop ... They always have the water urn at hand and drink water as well, in big mouthfuls, to restore themselves. Women never take part in their banquets, and are not present when they drink and eat in company.
Much more can be said on the topic, but I hope this helps.
A bit fragmentary but take a look at these answers from /u/Spoonfeedme, /u/Qweniden and /u/kmbl654
I can try to answer your first question. Although my approach will look largely consider its religious significance in ancient Greece.
A myth recounted in Homer's Iliad refers to Dionysus chased by Lycurgus of Thrace who wields an Ox goad symbolic of the coming harvest. Dionysus escapes his wrath through a katabasis through 'salt surf' to the refuge of Thetis. Thereby mingling with the saltwater (Another story this time relevant to Lerna recounts his retrieval of Semele) or he was thrown in there by Perseus. One later 2nd CE account of Pseudo-Apollodorus Bibliotheca suggests drinking undiluted wine appeared poisonous and led to the slaying of Ikarios, therefore it had to be diluted to tame the wild chaotic force within.
The Anthestheria in Athens featured a ceremony during the Pithigoi where the wine would be mixed with water before drinking. This had a practical (sweeter taste, less intense, increased the volume) and symbolic ritual significance Dionysus' temple was located beside Lerna and in particular, lake Alcyonia from kingfisher and Halcyon, earning him the epithet Limnais (referring to lakes) the place of purification. This might be supported by an alleged fragment of the 5th BCE Phanodemus directly quoted by Athenaeus in his Deipnosophista 11:465. If you choose to see it as a helpful source that is.
Aristophanes Frogs recount this delve into the underworld in the context of meeting with the long-dead military generals to save their predicament in the Greco-Persian Wars. Dionysus is met by a chorus of frogs evoking the festival's third-day Chytroi ( the pots) distinctly connecting to the cult of souls (Keres) who would wander freely from day one. 1, 2
Pausanius notes annual nocturnal rites were carried out once a year and respect was also paid to Kores' descent to Demeter (2. 37 5) Plutarch describes the Argives at Lerna involving trumpets and the libation of a lamb in the waters to appease the gatekeeper so Dionysus can leap out in bull form (Moralia)
In the Odyssey, Circe tells Odysseus to pour Milk, blood, water, honey and barley into a trench of dirt (Bothros) as a libation to ALL the dead to open the underworlds gates and reach the dead. The wine was commonly poured on tombs in libation on the second day of Anthestheria Choes (The pouring) The same libation choice is seen by Queen Atossa in Aeschylus' Persians when summoning Darius' shade
There is also a curious reference to blood mingling with mare's milk in the customs of the Massagetaes. Latin authors like Orosius and Seneca echoed the Massagetaes' stereotypical depiction as savage fearless blood-drinkers Herodotus account how they are tricked into drinking wine by Cyrus, losing their ability to fight. Cyrus is then drowned by the vengeful Tomyris in a wineskin of blood. This is more so just interesting to mention.
There is also the rationalised account of its advent by a slave of Kos who Pliny recounts mixed the two purely to meet a quota.
So it was done for practical reasons but could also be said to have a distinct connection to the cult of souls and libation requiring purification of water.
1 Ana Isabel Jimenez, San Cristobal, 'Artemis and Dionysus Encounters in Natural Settings: Lakes and Marshes' 2021
Cennet Pi̇şki̇n Ayvazoğlu, Dionysos and the Festival of Anthestheria at Claros, Colloquium Proceedings at Lyon 2012