This paper is devoted to nonlinear observer and controller design for water level control of open-channel flow in irrigation canals or dam-river systems. A finite-dimensional model, previously developed by orthogonal collocation methods, based on Saint Venant equations and used for control design, is now further used for online flow rate and water infiltration estimation. This is done by a so-called state observer. In particular, the estimates obtained in this way can successfully be used in a controller previously proposed, resulting in a water level control law using only two level measurements along the canal (instead of the four measurements previously needed). The study is restricted to the case of a rectangular wetted section and subcritical flow. The results have been validated by simulations, on an implicit finite difference simulator based on a Preissmann scheme for various scenarios.