When UpdatePanel is used in the RenderMode="Inline" it renders itself as a span. W3C validation fails if span container starts with element other than allowed by standard.
In case of XHTML 1.0 Transitional this is:
"object", "applet", "map", "iframe", "button", "ins", "del"
So for example <span><div ... will definitely fail.
google.com page has got 67 w3c validation errors, so I'm not trying to say that it is that important, ... just in case your customer have to see that W3C green message:
By the way, if you are thinking about installing the W3C validator on your local windows box, I can share my experience: It is quite unusable for me because of the slow perl execution, while google.com takes seconds to validate, moderately bigger page may take hours to do so.
Validation in Firefox in turn only found 42 errors for the google.com compared to 67 of W3C.