OP: My question is why was it is significant for G-d to separate from those who drunk water on their knees?
Lange's Commentary - Judg. 7 - pdf p. 320
...The question is, What characteristic did it show in the 300 men,
that they did not drink water kneeling, but lapped it with their
tongues, like dogs. Bertheau has followed the view of Josephus (Ant.
v. 6, 3), which makes those who drink after the manner of dogs to be
the faint-hearted. According to this view, the victory is the more
wonderful, because it was gained by the timid and fearful. But this
explanation does not accord withthe traditional exegesis of the Jews,
as handed down by others.
Moreover, it contradicts the spirit of the whole narrative. When
Gideon was chosen, it ws for the very reason that he was a "valiant
hero" (ch. 6:12). All those who were deficient in courage were sent
home by the, proclamation (v.3). If faint-heartedness were demanded,
the brave should have been dismissed.
Finally, God saves by few, indeed, if they trust in Him, but not by
cravens. Cowardice is a negtive quality, unable even to trust. To do
wonders with cowards, is a contradiction in adjecto; for if they
fight, they are no longer cowards. Cowardice is a condition of soul
which cannot become the medium of divine deeds; for even the valiant
few, when they attack the many and conquer, are strong only because of
their divine confidence....
The Jewish interpretation, communicated by Raschi, is evidently far
more profound. Gideon, it says, can ascertain the religious
antecedents of his men from the way in which they prepare to drink.
Idolators were accustomed to pray kneeling before their idols. On this
account, kneeling, even as a mere bodily posture, had become unpopular
and ominous in Israel and was avoided as much as possible. Hence, he
who in order to drink throws himself on his knees, shows thereby, in a
perfectly free and natural manner, that this posture is nothing
unusual to him; whereas those who have never been accustomed to kneel,
feel no need of doing it now, and as naturally refrain from it....
The three hundred - this is what God makes of Gideon to know - have
never kneeled before Baal; they are clean men; and with clean vessels,
men, and animals, God is accustomed to do wonderful things. Midian's
idolatrous people shall be smitten only by such as have always been
free from their idols.....
Commentary on this topic carries on for another column, and I found it all interesting. Thanks for the question.