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Technically, the condition isn't actually an allergy at all, since it's likely caused by an immune reaction to something within the body, rather than an over-reaction to something foreign, such as pollen or peanuts.
The earliest theory to explain how it works is that water is interacting with the outermost layer of skin, which consists mostly of dead skin cells, or the oily substance which keeps skin moist. Contact with water may cause these components to release toxic compounds, which in turn leads to an immune reaction.
Others have suggested that water may simply dissolve chemicals in the layer of dead skin, allowing them to penetrate deeper where they can cause an immune reaction.
Comment: For more on listeria, see: