How does water pollution affect life on earth?
By changing the water basic properties and making it inappropriate for living systems whose existence effect other creatures, in the "web of life"
This is a tough question and a clear answer could take a paper, maybe a book, but I am going try to make my best.
Life in earth is connected, as goes the book by F Capra, the "web of life". Every living system depends on the other somehow. We have basically two groups of living systems, the ones that live in "land" (e.g. ourselves, tigers...) and the ones that live in water (fishes, whales...); of course we have intermediate ones such as turtles and frogs.
The life of fishes effect the life of birds, bears, and so on. Fishes are quite sensible to water states, e.g. levels of oxygen, the same way we are in air. Pollution exists in several levels, such as chemical substances such as mercury, or "micro-substances" such as wastes.
Micro-substances, e.g. heavy metals, can enter the body of fishes and then reach men, for instance, it is well-known that heavy-metals such as lead, can cause irreversible health problems in mankind.
Macro-substances such as cans and old "things" can serve as traps to living animals, killing them in several cases.
Another example, more subtle, is when a pollutant makes water heat faster, then oxygen leaves the water in a higher rate, or when pollution increases the concentration of algae, making water darker than normal, several creatures inhabit the deaths of oceans and lakes.
So, you can see that the answer is more complicate than seems, but basically pollution change the natural state of water, the natural habitats of several living creature.