You are correct, the default behaviour of the core is to use the default UpdateMode for an updatepanel,
which does an update on all present on the page.  This is definitely an oversite and I believe the next version of dnn
will have this property set to conditional.  You can modify the core to do this by adding the following to the AJAX.vb file.

        Private Shared m_UpdatePanelUpdateModeType As Type

        Private Shared Function UpdatePanelUpdateModeType() As Type
            If m_UpdatePanelUpdateModeType Is Nothing Then
                m_UpdatePanelUpdateModeType = Reflection.CreateType("System.Web.UI.UpdatePanelUpdateMode")
            End If
            Return m_UpdatePanelUpdateModeType
        End Function

'Update this method.
        Public Shared Function CreateUpdatePanelControl() As Control
            Dim objCtl As Control = CType(Reflection.CreateInstance(UpdatePanelType), Control)
            Reflection.SetProperty(UpdatePanelType, "UpdateMode", objCtl, New Object() {System.Enum.Parse(UpdatePanelUpdateModeType, "1")})  'Conditional
            Return objCtl
        End Function

Just to be clear, are the below statements correct? 

Currently, when I check "Supports Partial Page Rendering" DNN automatically puts in an UpdatePanel that surrounds my module.  So any other UpdatePanel I put into my module is nested within the default DNN UpdatePanel.  This will never change.

That would mean when anything is updated inside the DNN UpdatePanel, any UpdatePanel I put into my module is "nested" and would also be updated.   However, if I try to update my own nested UpdatePanel inside the DNN UpdatePanel, only my one nested UpdatePanel will actually update.

Now if I put in the code for "conditional" partial page updating as supplied above (thank you!), I can update the main DNN UpdatePanel without updating my nested UpdatePanels?

Thanks for the clarification.

I'm not sure it is neccessarily a rare occurance; using "Supports Partial Rendering" registers the Script Manager in addition to creating the default Update Panel.  It's not like it's hard to handle the script manager manually in the module, but having the framework do it for you seems like a good idea.  Also, I still think it is counter intuitive to have an AJAX enabled module that requires this setting to be OFF.  Since it can be selected by a super user after deployment, there's really no guarantee that it won't be.  I guess that the opposite of that is true as well - someone could always come along behind you and uncheck the setting, but that should just make everything update the whole page anyway.