OK. A few things for you to check. First, make sure your environment is setup properly.
In the /bin directory you should have AtlasControlToolkit.dll, AjaxExtensionsToolbox.dll, Microsoft.Web.Extensions.dll (technically for Update Panel you only need Microsoft.Web.Extensions but you might as well setup it all up at once)
From the Atlas downloads, copy the ScriptLibrary folder to the root of your site. This should contain Release and Debug folders and have six files each (MicrosoftAjax.js, MicrosoftAjaxRuntime.js, MicrosoftAjaxWebForms.js, PreviewDragDrop.js, PreviewGlitz.js, PreviewScript.js)
Lastly, your web.config should enable the Atlas Framework (as if you had created an Atlas Website).
Items in RED should be added or updated.
<section name="profiles" requirePermission="false" type="DotNetNuke.Framework.Providers.ProviderConfigurationHandler, DotNetNuke" />
</sectionGroup>
<sectionGroup name="microsoft.web" type="Microsoft.Web.Configuration.MicrosoftWebSectionGroup">
<section name="converters" type="Microsoft.Web.Configuration.ConvertersSection"/>
</sectionGroup>
</configSections>
<microsoft.web>
<converters>
<add type="Microsoft.Web.Script.Serialization.Converters.DataSetConverter"/>
<add type="Microsoft.Web.Script.Serialization.Converters.DataRowConverter"/>
<add type="Microsoft.Web.Script.Serialization.Converters.DataTableConverter"/>
</converters>
</microsoft.web>
<connectionStrings>
<httpHandlers>
<!-- This is for FTB 3.0 support -->
<add verb="GET" path="FtbWebResource.axd" type="FreeTextBoxControls.AssemblyResourceHandler, FreeTextBox" />
<!-- This is for Atlas Support -->
<add verb="*" path="*.asmx" type="Microsoft.Web.Services.ScriptHandlerFactory" validate="false" />
<add namespace="DotNetNuke.Entities.Tabs" />
</namespaces>
<controls>
<add namespace="Microsoft.Web.UI" assembly="Microsoft.Web.Atlas" tagPrefix="Atlas"/>
<add namespace="Microsoft.Web.UI.Controls" assembly="Microsoft.Web.Atlas" tagPrefix="Atlas"/>
<add namespace="AtlasControlToolkit" assembly="AtlasControlToolkit" tagPrefix="Atlas"/>
</controls>
</pages>
<xhtmlConformance mode="Transitional" />
Here's a working example of an Update Panel.
http://www.netqconsulting.com/CodeSamples/Atlas/UpdatePanel/tabid/152/Default.aspx