Abstract: A direct contact water heater having a hybrid heat source, and its method of operation is described. The water heater is comprised of an elongated vertical tubular housing having a water spray nozzle in an upper end thereof for spraying water substantially uniformly over a top packing of heat exchange bodies. An intermediate space is provided below the packing where external hot recovery gases are admitted into the housing. A burner chamber is provided at the bottom of the housing above a reservoir to provide a primary heat source. Heat from the primary heat source mixes with the hot recovery gases below the packing, and is in counter-current flow with the water percolating through the housing from the packing located at the top of the housing. Two packings of heat exchange bodies may be provided in the tubular housing spaced from one another with the hot recovery gases fed between the two packings and the primary hot gas from the heat source being generated below a lower one of the packings.