Solution:
To make Response.Redirect work inside Update Panel, we need to add below in our web.config.
<httpModules>
<add name="ScriptModule" type="System.Web.Handlers.ScriptModule, System.Web.Extensions, Version=1.0.61025.0, Culture=neutral, PublicKeyToken=31bf3856ad364e35"/>
</httpModules>
More Info:
Basically when we are developing web application using Visual Studio 2005, two options are available. Please see the image below
If we create our web application by selecting ASP.NET Web Application, then we need to do everything manually for using AJAX Extension.
If we create our web application by selecting ASP.NET AJAX-Enabled Web Application, then no need to add manually. Everything will be added automatically in web.config also. So at this case we have no problem. But for the above case, we need to take care of this thing.