it does indicate that the oil has water mixed into it mate, could be from the oil cooler section of the rad leaking into the water and vice versa, but the grey smoke (does it look actually blue?) sounds like its burning oil or other contaminant in the cylinder, but you need a compression leakdown test of all 4 cylinders to verify this. Also if the gasket has gone, you will get water loss and possibly overheating depending on the severity of the leak.
If your oil has water in it, it wont be lubricating as water is actually abrasive and the engine oil will be quite useless. You need to get it checked out by a competent mechanic and tested, then go from there.
Burning oil and blue smoke is a slightly different situation but could be emulsified oil finding its way into the combustion chambers.