You can replace "although" with a number of expressions that are synonymous without significantly changing the syntax of your sentence as you did in sentence 2. Here are some examples:
Even though the merging step increased the incorrect growth of the water over the grasslands, the merging didn't affect the classified tree clusters because the algorithm didn't lose any candidates.
or
Despite the merging step's having increased the incorrect growth of the water over the grasslands, the merging didn't affect the classified tree clusters because the algorithm didn't lose any candidates.
or
The merging step's having increased the incorrect growth of the water over the grasslands notwithstanding, the merging didn't affect the classified tree clusters because the algorithm didn't lose any candidates.
There are other problems with the sentence, though. It sounds awkward to me. Maybe the phrase "incorrect growth of the water" should be changed to "flow of water", and maybe "the merging" should be changed to "the merge". I can imagine some scenarios in which irrigation water or flood waters merged and inundated grasslands, but I don't really know what this sentence is talking about, so it's difficult for me to come up with any better alternatives. I don't much like the three I've suggested, but editing someone else's writing without fully understanding what they want to say is usually somewhere between difficult and impossible.