There are a number of sources for this on the internet. I have to say that my own experiments on this proved that it depends what you want to achieve.
One of the box2d demos in the sticky thread was a great way of making objects appear to float on waves.
If you are after a waterfall or a dynamic water effect there are a number of ways of doing this too.
I did one version where I created hundreds of particles with a blue "fuzzy" image with zero friction that worked quite well. If you want surface tension it gets a lot more complicated...
The main question is what kind of water effect are you after?
