I finally got a chance to put some code down on this and now have a demo running (it's a Java applet):
http://www.jbox2d.org/liquid/Very rough, a lot of tuning needed, not optimized, doesn't look quite like water, too "gloppy," etc. - yup, I know. Basically, this is not ready for release or use, nor is it actually integrated into the engine (I hard coded this example). It's also not physically accurate, as I'm using a simplified solver at the moment. And I can't even release the code yet because I may have used a couple things I don't have permission to redistribute source for, so there's a lot to do on this...
But it's 1000 particles, and it runs decently fast (graphics slow it down quite a bit, but the simulation itself is pretty quick), so that's encouraging as a proof-of-concept. To be truly useful this type of simulation would have to be supplemented by a cheaper buoyancy solver, maybe one that does some simple wave mechanics, too, so that you can simulate larger bodies of water, since this simulation method gets unstable when the pressure gets too high.
Is there much interest in this type of thing? I'm also working on some soft body blob stuff if anyone thinks that should be higher priority.