Since this post is more than 24 hours old, I'll give it a go.
The answer to your problem is probably fog. We're going to try to create an effect where the edge of the water fades into a distant mist which in turn fades into the sky, thus obscuring the seam between the two.
1. Issue the following command:
SET OBJECT FOG SkySphereObjectNumber, 0
This will make it so that the fog doesn't effect the sky sphere.
2. Issue the following commands:
FOG ON
FOG COLOR RGB(255,255,255)
FOG DISTANCE NearDistance, FarDistance
These commands will turn on the fog, colour the fog (white) and set the near and far fog ranges. The colour of the fog probably won't be white. Grey or light blue or something - that's your call. The near distance is the distance at which the fog effect will begin and the far distance is the distance at which an object will completely obscured by the fog. Note: The help file lists the far distance as the only parameter; it will take both parameters as described. The far distance should be just inside the sky sphere. The near distance depends on how gradual a fade you want; play around with it. Obviously, the near distance has to be less than the far distance.
3. This is where you're going to have to get a little bit artistic. Since the fog won't be applied to the sky sphere, it's going to have to be painted on. Paint the bottom half - a little more than the bottom half, actually - in the colour of the fog. This colouring should gradually but quickly give way to the blue sky and the clouds. What we're going for here is that the colour of the sky sphere should be exactly the same colour as the fogged water at the points where they meet.
Hopefully, this will give you the effect you need. A possible problem that you may encounter is that the fog won't be applied properly to the water plain. If this is the case, you won't be able to use a MAKE OBJECT PLAIN command to make the water. You'll need to use a mesh for that.
Give this a go and see what you get. Let me know what happens.
- Jane