Solution: (1) Assuming that the average annual growth rate of investment in "water improvement project" is X, then 600 (1+x) 2 =1176.

The solution is (1+x) 2 =1.961+x = plus or minus 1.6x=0.6 or x=-2.6 (inconsistent), so the average annual growth rate of investment in "water improvement project" is 60%; (2) 600+600×1.6+1176 = 2736 (ten thousand yuan)

Therefore, * * * invested 27.36 million yuan in the "water improvement project" within three years.