I've never seen that particular problem before except in this thread. I use the SH5 Water for SH3 20km mod, and it's the only environment mod I have.

Well it was definitely the NVIDIA settings. In case anyone else ever has this problem, I hope it helps.

I had played SH3+GWX many times, never an issue..

Then I tweaked my NVIDIA card by reading something online and it was supposed to make my flight simulator look prettier I guess.
So here is a screenshot similar to OP:

http://i66.tinypic.com/1z2d8ap.jpg

After reading this post, I went to the NVIDIA INSPECTOR and clicked the "DEFAULT SETTINGS" button..
All is well now :) .. no idea what this will do to my flight simulator but who cares lol..

New screenshot:

http://i67.tinypic.com/2mp0dgw.jpg

I had the same problem:
http://www.subsim.com/radioroom/show...1&postcount=22

And the solution:
http://www.subsim.com/radioroom/show...1&postcount=25