This subject is often one of confusion and occasionally contention in Christian circles. Often the conversation Jesus has with Nicodemus in John chapter 3 is tied to the spiritual regeneration that is often seen to place a new Christian in the body of Christ.
I recently heard a suggestion that separates these two somewhat. The thesis is that the conversation with Nicodemus was more oriented towards Israel and the expectation of the kingdom. In particular Nicodemus was criticized for not being aware of the concept. This points to an expectation that the idea of water and spirit should have been understood from the Old Testament.
Support for this thesis was given from Ezekiel
Eze 36:25 Then will I sprinkle clean water upon you, and ye shall be clean: from all your filthiness, and from all your idols, will I cleanse you.
Eze 36:26 A new heart also will I give you, and a new spirit will I put within you: and I will take away the stony heart out of your flesh, and I will give you an heart of flesh.
Eze 36:27 And I will put my spirit within you, and cause you to walk in my statutes, and ye shall keep my judgments, and do them.
Eze 36:28 And ye shall dwell in the land that I gave to your fathers; and ye shall be my people, and I will be your God.
The idea of “water” and “spirit” was supposed to have been understood as associated with the reception of the Kingdom.
I found this thesis to be somewhat persuasive. I do not think it takes away from the doctrine of spiritual regeneration of Christians today, but it does clarify as to why it was expected of Nicodemus to understand that to which Jesus referred.