General understanding of the water resource base on both surface and ground water, and their interaction is one of the gaps of water resources development in Ethiopia. Water resources management has limited in the Megech watershed and there is traditional water allocation practice. This was due to lack of sufficient awareness about available water resources and management in watersheds. Understanding the potential, availability and use of surface water in Megech would help to increase the productivity of agriculture, to improve the traditional water management system. Therefore the objective of this study was to assess surface water resources potential, and water allocation system within the Megech watershed. The surface water availability was evaluated by using the Parameter Efficient semi- Distributed Watershed model. Calibration and validation of the model was done by using the stream flow data from 1990-2004 and 2005-2010 respectively. Water Evaluation and Planning (WEAP) model to evaluate scenarios of water resource development in the Megech watershed. Water demand was simulated for three different sectors including domestic, livestock and agriculture. The model results provided a good agreement with the predicted one with R2 of 0.63 and NS of 0.61. Megech watershed has an average annual flow estimated as 397.34 MCM. The approach used in this study helps for public water Allocation as a mechanism that promotes the equitable water use, and to sustain environmental needs proposed to apply in Megech watershed. The study, therefore, provide information to decision makers for recommends that integrated and coordinated water resources development strategy is required in Megech watershed.