water inside combustion chamber?

Tohatsu Guru please help: My M40D2 has 3 unburnt oil recirculation lines on the side. One of them worked loose from it's nipple due to a weak hose clamp while the engine was running on the garden hose. It was the recirculation line with the nipple half way up the engine. The engine started backfiring and when I put the line back on it stopped backfiring. Some oil came out of either the nipple or the line and it was milky colored and not black. I know for sure there was no water outside the engine for it to fall into. Do I have a cracked crankcase, head or bad seal? Or please tell me it's normal or something simple and cheap to fix. Thanks, David.

It sounds like you have more than one issue. I would suspect the following:

Water issue

Water contamination in the oil tank/oil lines themselves

Backfire

1) Broken flywheel key(not likely)
2) Bad trigger coil
3) Bad CD module
4) Not a backfire at all(Popping due to a lean condition on one or more of the carbs)

Or:

You might have a water leak into the block at some point, but I have never seen or heard of water being able to make it's way into an oil line unless the engine was sunk. If you had a leak big enough to produce so much water that it could contaminate the oil it should prevent the engine from running on that cylinder, so....I would call it possible, but literally the last thing that I would look for if you dumped the engine on me.

Generally speaking, always look for the most likely cause first and then look at the rare stuff last.