No, actually the fuel pellets never need to come in contact with water; it is their cladding, which is a zirconium alloy ("Zircaloy"), which can react with steam under extreme conditions. It's a redox reaction: Zr + 2H2O --> ZrO2 + 2H2 or something similar.

This actually happened at Three Mile Island, and there was a hydrogen explosion in the containment building there (which did not break).

(I am not an engineer)