A domestic gas-fired water heater condensing flue system wherein in one embodiment a blower is secured at the outlet end of the flue pipe to direct the hot flue gases through an external heat exchange flue conduit. The external heat exchange flue conduit has a sealed water channel surrounding a narrow flue gas internal passage. Water from the bottom end of the tank is circulated in the external heat exchange flue conduit and release in the top part of the tank. In a further embodiment, an inverted U-shaped flue pipe is supported vertically in the water tank and the domestic water supply for the tank is disposed in a downward section of the flue pipe to pre-heat the water supply to the tank and cool the flue gases before being released to atmosphere. The water in the tank is heated by the upward and downward sections of the U-shaped flue pie.