Background: Aedes aegypti, the major vector of dengue viruses, often breeds in water storage containers used by households without tap water supply, and occurs in high numbers even in dense urban areas. We analysed the interaction between human population density and lack of tap water as a cause of dengue fever outbreaks with the aim of identifying geographic areas at highest risk. Methods and Findings: We conducted an individual-level cohort study in a population of 75,000 geo-referenced households in Vietnam over the course of two epidemics, on the basis of dengue hospital admissions (n = 3,013). We applied space-time scan statistics and mathematical models to confirm the findings. We identified a surprisingly narrow range of critical human population densities between around 3,000 to 7,000 people/km2 prone to dengue outbreaks. In the study area, this population density was typical of villages and some peri-urban areas. Scan statistics showed that areas with a high population density or adequate water supply did not experience severe outbreaks. The risk of dengue was higher in rural than in urban areas, largely explained by lack of piped water supply, and in human population densities more often falling within the critical range. Mathematical modeling suggests that simple assumptions regarding area-level vector/host ratios may explain the occurrence of outbreaks. Conclusions: Rural areas may contribute at least as much to the dissemination of dengue fever as cities. Improving water supply and vector control in areas with a human population density critical for dengue transmission could increase the efficiency of control efforts. Please see later in the article for the Editors' Summary.