If you want her totally outside trained and the crate is working for you, then I'd go for that. You'll have to decide if you think it's cruel. I don't. My puppy is crated a ton to limit accidents and stop the chewing/eating things that aren't edible. I just can't watch a dog for 16 hours a day.
Assuming that everything is okay medically, I'd be taking pup to pee, praising like crazy, playing for 15 minutes, back in crate for at least an hour, out to pee, play for 15 minutes, crate for at least an hour, etc., etc. if that is working for her. Now if she is in there crying to pee, you'll have to figure something else out. The only reason I can think of to restrict water is if this is a medullary washout situation. Sometimes dogs overdrink, their kidneys stop concentrating urine correctly, and then they have to go more. A urinalysis would give you much more info and rule out infection which would be a big concern. Could just be that it's a tiny puppy bladder though. I would not say to restrict water in a thirsty dog who constantly urinated because on the off (very unlikely) chance that diabetes insipidus is present, that would not be safe.
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