Politian has a great blog series where he goes into the details of building a data-driven Ajax application using the new 4.0 client templates and data.
Check it out! http://politian.wordpress.com/
Oh sure... you think it is great because of thr AJAX stuff... but you don;t even mention the ADO.NET Data Services part ... great*2 ;)
@Nick: actually I do: "Ajax templates *and data*" (emphasis added). The client-side support for ADO.NET data services is pretty awesome too.
I also have hit the same snag, although I'm using the Telerik RadAjaxManager (which, I believe, creates UpdatePanels) rather than creating UpdatePanels directly.
The new ADO.NET Data Services client stuff was working perfectly (hats off to the developers) when I used it on a standalone test page. I am using it to hit a data service and populate a TreeView on the client, and it was very easy to use and performed very well. Unfortunately, it choked (with the error mentioned above) when I used it on my real page, which had the RadAjaxManager on it.
Sure hope there's a workaround or fix...
@Tim: yes, you need to use the 4.0 version of MicrosoftAjax, but even if you do, the current preview is incompatible with UpdatePanel. This will be fixed for the final release, of course.
@Kyle: this is probably the same problem, although I can't speak for Telerik. It is possible that they will have to provide an update for that once 4.0 is released.