The first thing that you should do is eliminate any negative reinforcement tools that you are using for discipline. Loud noises, water bottles - these serve to frighten and startle them, but it also serve to associate contact with each other with being frightened, startled, and sprayed. Rather than make them more willing to be around each other (and stress-free), this is going to make them more likely to want to avoid and attack each other, because bad things happen when they get close.
Separation can be a good thing, but it is not going to be a permanent solution to the problem. There are going to be several steps you will want to take in order to help ease the tension for when they come together again:
- Making sure that each has a safe space: Cats are very territorial. This means that once your newer cat started needing areas of his own territory, it started to conflict with your older cat's already established territory. So anything he claimed as his "own" space was essentially a space he took from her. This tends to make cats a little bit more angsty with each other.
The best way to deal with this sort of issue is to three-dimensionalize your home. Most cats will be able to tolerate being in the same room together so long as one is able to go up, and one is able to stay down. This means building shelves on the walls to allow them to reach the furniture, and providing things that will allow them to travel from one side of the room to the other just by walking over the tops of cat trees, shelves, furniture, etc. This will give the added bonus of neither cat feeling trapped on the ground with no other place to hide, because they can always go "up" and run away.
- Making sure that being in the same room is a positive experience: Negative associations are going to be killer to their relationship, but positive ones can only help. This means you need to bring out the toys and the treats when they are being peaceful in the same room together.
If they fight, don't shout or spray, just calmly remove them from the same area (if you feel like your hands are safe reaching in), or completely ignore them.
If they are not fighting, reward them with a treat! Do this only when they are together, and soon they will start to see the presence of the other cat as something good that brings the treats, rather than something scary.
Toys serve to distract and create good associations as well. If you bring out a toy, this puts their focus on something fun that's not each other. The vast majority of cats will ignore each other to chase a toy, especially if it is one you are whirling around the room at high speeds.
- Neutralizing the areas of cohabitation: Along with more spaces to go up and out of the room, it's never a bad idea to try pheromone plug-ins in the areas where they come together frequently. This being the living room, the places with food, the places with the litter boxes, etc.
Feliway is a good brand that has a pheromone plug-in with calming/soothing pheromones. It will help to disguise the areas where they smell tension and fear on each other. For some cats, this may not work as well, but with others, this works REALLY well.
- Making sure that they are both out of energy on a daily basis: Any cat that is attacking another cat is a cat with too much excess energy. Cats spend the vast majority of their day sleeping, and the rest prowling their territories, hunting, and eating.
So long as they're sleeping or resting, they're okay. But when they're doing their cat-hunt thing, this is the time when they need to be distracted and worn out. For at least an hour a day, you should get a toy (something on a string or pole tends to work best), and run them ragged with it.
This should be something with feathers that you can spin in the air to get them jumping, and drag on the ground to get them running. You want them to run and jump until they're too tired to do it. Once they've lost interested in the toy and have settled in separate corners to lay down and lick themselves, give them a few treats each or a bit of wet food to "reward" them for hunting. They should conk out pretty shortly afterward.
Start doing this for an hour, then if they continue to have spats during the day, increase the frequency and add another bout of play during the times they seem to be going at it the most.
You can find "teaser" toys that fit the bill almost anywhere, but here's a google search of the types of toys, just to give you an idea of what they respond to the best:
- Giving them an area of respite to retreat and retire when they become over stimulated: Again, up is always a good way to go. But out is also important. This may mean that you need to make separate rooms for them. Two places with two litter boxes that don't necessarily need to be shared. Move his or her favorite perch spot to a different room to give them a place to hide where the other cat is not lurking on a regular basis.
- Time: And patience! Right now they are agitated with each other, and the above steps won't solve the problem immediately. But you should see great strides of improvement. They've learned to be anxious, afraid, and aggressive around each other, and they may need as much time to learn not to be. Cats are extremely sensitive creatures when it comes to social relationships, and trust can be broken between them EXTREMELY quickly. It's going to be important that you learn to identify the times and places where they seem to be the most caught up in fighting (are they coming around a certain corner and startling each other?) and work towards neutralizing that issue (such as providing an alternate route along the walls or ceiling so they can both pass by without having to come into contact when coming around said corner).
This will require you to ignore and redirect a lot of behavior, which is hard when they're being loud and frustrating. But just remember that when you get loud and frustrated back at them, they pick up on that and react with defensive aggression, screaming, hissing, and an aversion to being around each other.