I looked at the demo, but can not help you with the water problem right now, though I do have an idea of what might be causing the explosions.
As for the patch: does reducing the mass help in fixing the problem? I would have thought increasing the mass should be more suitable in that it makes the sphere more resistant to movement (as does increasing the damping).

Some more remarks on the demo:
- no mirror/transparency effect
- the warlock becomes invisible after being shot (is that by design?)
- nice bleeding, though it would be neat if the puddle size was varying
- great ripples, but for some reason the ripples also appear around the player's feet

If you have not done so already, download the Half-Life 2 engine/game video from E3. It's 600MB but well worth it. Many of the physics effects shown there can be reproduced with A6 (buoyancy and "soft bodies" not yet). How about recreating a GameStudio demo with that gravity weapon ?