It's been a long time since I messed around with water. I know it can be fussy to work with.
You can do it the way Psykore describes to get the surface working, which looks great but wave motion will be absent. It's good for stagnant pools and such, also good for fog effects, too. Wave motion will require another object, a PolyGrid, I think. You'll also need a Water(or Fluid?) Volume to get the physics of immersion working properly. It has a number of properties that you can tweak to get it looking the way you want.
Your best bet is to start a new map, one just for the sole purpose of experimenting with water. So, basically 6 walls/floor/ceiling and add the essential Objects only: WorldPropertiesObject and Player start. Maybe add a Light as well. Then add the water elements and just mess around with them until you get them working. Doing it this way will cut down time spent on processing your Hero map - and if you completely f**k it up, it won't matter.
For the darkening of the skybox, try adjusting the FogInfo values in the WorldProperties Object. Dark fog should do it. I think you may have to experiment with that too. Copy the SkyBox from your Hero map to your water test map and set the walls and ceiling to be SkyPortals. That should speed things up for you, messing around with water and sky stuff on the same test map.