I've asked about this, and, if I am not on insulin at the time of labour I will be allowed to have a water birth. The consultant mentioned that the midwives may need to check my blood sugars every now and then during labour and the odd fetal heart monitoring which can be done in water, (which is fine with me).
Every woman/pregnancy is different and I would suggest you ask if you can have one or not. Also, if you are refused, ask for the reasons behind their decision, just so that you know they are not treating you as a "textbook case"
Oh, and I am not being induced as such, I have asked for a sweep on my due date but that's it - I'm not allowed any gel/pessary etc due to a previous c-section..... again, every case is different. In my hospital, if your baby is of 'average size' at 38 weeks (as seen on scan) you do not have to be induced, but you are asked to be checked over at least three times a week until you go into labour.
And during labour, unless anything goes 'wrong' I will not be hooked to any drip, nor will I be constantly monitored. Having said this, if I am put onto insulin between now and labour, a lot of things will change!
Your consultant/midwife will be able to advise you the best as they know your medical history (and I don't!

) but I would definately recommend that you ask!