The management of water is crucial keeping in view the assessment, the availability and utilization. It needs proper planning and efficient management of water is foremost for development of a country. For efficient use of water resources, reservoirs are to be planned and operated under proper management of water resource systems using appropriate simulation and optimization models. For efficient use of water resources, reservoirs have to be planned and operated under proper management using appropriate simulation and optimization models.This research was done to evaluate the performance of the reservoir and to develop the optimal rule curve for Angereb reservoir using stochastic dynamic programing based model of Reservoir.The storage capacity of the reservoir is small as compared to the domestic water demand of Gondar town. As the result, evaluating the performance of the reservoir and developing the optimal rule curves that could satisfy the demand with the highest proportion and with lowestreservoir failure level is crucial. For this case study,the stochastic dynamic programming based model was used to simulate the reservoir water balanceand develop the operation guide curves for 100%, 75% and 50% reliability scenarios using standard and optimal operating policies. The analysis result shows,75% reliability scenario would satisfy the objective function in the better way. As the result, it was used for the derivation of optimal operation guide curves for the reservoir. From this paper result, someone can understand how to plan, manage and use the available limited water efficiently in reservoirs which would be located in water stress areas.