To set the Watermark Text of a TextBoxWatermarkExtender in the AJAX Control Toolkit, use the following code:
var behavior = $find('<%= TextBoxWatermarkExtender1.ClientID %>');
It took me a while to find that I needed to call the Initialize() function before the Watermark Text would get updated.
Update September 25, 2012
It appears that different versions of the AJAX Control Toolkit have different public methods.
var behavior = document.getElementById("<%= TextBox1.ClientID%>").AjaxControlToolkitTextBoxWrapper;