>3. Continuous range from say 1 cm to say 30 cm deep, with 1mm accuracy.

 Does it really need to be perfectly linear instead of stepped?

One way to do this is have a long piece of Perspex which thins down in =
steps. shine an opto reflector down it, and then measure the light =
coming back. As the steps in the Perspex go under water they stop =
reflecting the light. For your purpose the rod could be at an angle in =
the ballast tank.

It may be possible to make a truly linear one using a tapered rod, =
especially if it is grooved in minute steps all the way down, a bit like =
a fresnel lens.


at the top I would be tempted to have a tiny groove between the led and =
the sensor to try and remove crosstalk between the two caused by light =
going straight across instead of down the rod.

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