I would like to know about the
recommended approach
Well, that depends on what you are doing, what parts of the form are you updating, how big is the form, what values are you sending to the server.
Generally speaking, if you want to update something simple (dropdownlist, listbox, etc), youd generally use JavaScript (or jQuery) to call an AJAX-enabled web service. This way, you're only sending to the server the data it needs, things like ViewState/cookies are not sent over the wire. You also have full control over the pre/post execution events (so you can add your loading images, call the WS, then clear them).
However, if you want to asynchronously update an entire form (which has a lot of controls), you're probably right in using an UpdatePanel. Things like a GridView are a good case for an UpdatePanel (as you usually need to handle editing, binding and paging all asynchronously).
The progress image is made easy with the following code:
<ProgressTemplate>
<img src="someloadingimage.gif" alt="Loading" />
</ProgressTemplate>
Stick that inside your UpdatePanel, and whenever an AJAX call is made, the loading image will be shown.
HTH