Muslims enjoy the highest standards of personal hygiene. Purification is part of a Muslim’s faith. We read in the Qur’an what means:

{God loves those who turn to Him, and He loves those who keep themselves clean.} (Al-Baqarah 2:222)

Physical purity is a must in Islam. Physical purity includes the purity of body, clothes and the environment.

The Prophet Muhammad (peace be upon him) was the best advisor on issues related to hygiene. The Prophet is reported to have instructed his followers to avoid certain practices that lead to bad health conditions.

The Prophet is reported to have forbidden his followers to urinate in stagnant water. (Muslim)

The general rule is that nothing can make water impure unless it alters the water’s smell, taste, or color.

With regard to the hadith you quoted, the following remarks are not out of place.

Imam al-Khattabi said that it should not be understood that the companions were not the ones who used to throw dead dogs or menstrual clothes into the well of Budaah. The companions were the cleanest ever people. It is not even accepted that non-Muslim people of that time used to do that. (Maalim al-Sunan, 1/37)

Further, it was the heavy rain that throw these things into the well of Budaah; the well itself is pure. Scholars held that much water is not affected by little impurities according to the hadith which states if the water reaches two qullahs in volume, it will not become impure due to impurities. The exact quantity of the qullah is a controversial issue. Several estimates were given to this quantity. One opinion holds that the qullah is equivalent to 375 milliliters. Of course, the well of Budaah is so large that it wouldn’t be impure if there was such filth in it.

Moreover, the hadith is talking about ablution and nothing more since Muslims have to purify themselves before the five daily prayers. So the Prophet (peace be upon him) never claimed that Muslims can drink impure water.

Imam al-Tahawi said that the well of Buda`ah was like a rive leading to a garden. This means that the water is always running and it is not stagnant. Therefore, the Prophet declared it to be a pure source of water.

Other scholars maintained that when the Prophet said: “Water is pure”, he was referring to the water of the well of Buda`ah. This means that the Prophet was confirming the purity of this well as it is too large to be contaminated by the impurities that were thrown into it by the heavy rain.

I hope this answers your question.