Wait a minute. You're arguing both sides now. If the fall off the mountainside killed the Balrog, why didn't the fall into the Abyss? As you correctly pointed out, an object falling at terminal velocity into a body of water should take massive impact damage. The implication is that either both Gandalf and the Balrog were somehow immune from impact damage (unlikely, given Gandalf's fear of falling--see below) or that the fall was somehow slowed. Since we have Gandalf's fear of falling, it follows that the Balrog must have done something to slow the descent. Either way, the fall off the mountainside could not have killed the Balrog by itself.

Oops, I deleted my reference to Gandalf's fear of falling. It is mentioned as Gwaihir is taking him to Lorien after the battle with the Balrog.