Simply provide the okcontrolid of the ModalPopupExtender1 to the submit button id as shown, so that it would close the popup window, once the click event handler of btnOkay is completed.
<cc1:modalpopupextender id="ModalPopupExtender1" runat="server"
cancelcontrolid="btnCancel" okcontrolid="btnOkay"
targetcontrolid="Button1" popupcontrolid="Panel1"
popupdraghandlecontrolid="PopupHeader" drag="true"
backgroundcssclass="ModalPopupBG">
</cc1:modalpopupextender>