In short, yes drinking water dilutes stomach acid. However, the stomach is capable of detecting and correcting this change (as it tries to keep itself balanced at a certain pH). Even if you drink a liter of water directly before eating, the change in pH of your stomach acid will be correct quickly enough to make little difference in digestion. Alternatively, drinking water before or with a meal is known to promote other positive health effects that are more beneficial than the detrimental affects of the minor, temporary increase in the pH of your stomach acid.
So yes, water dilutes gastric acid, not significantly enough or for long enough to affect digestion. Drinking water with food (and just generally staying hydrated) is significantly better than not doing so.
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