I've also found that capacitive screens are hard to come by if you're not an OEM. This 2009 article states "With prices of projective capacitive touch panels at about $2.50-3.00 per inch, the average cost for a touch panel module will be about $30 for a mainstream-size netbook". That, of course, is the price for Asus to buy 100,000 of them, not for you and me to tinker.
Fortunately, there are a lot of OEMs who produce products with capacitive screens, and there is a significant market for replacement screens. I'd recommend that you find a screen (Both LCD and touch panel) which meets your needs on an existing product (whether it's a touchscreen PC, netbook, or PDA) and then try to find a replacement screen for it. While you're looking, take a look at this comparison of the Nexus One, Droid Eris, Motorola Droid, and iPhone touchscreens, to help you decide what to get. Also look for hardware hacking forums for more help, as the datasheets will be hard to come by.
For an example screen, Sparkfun sells the replacement iPhone touchscreen and display for $140 - Not bad for the display, but a lot if you just want the sensor. Directfix (and many others) sell just the digitizer for about $30, some sell the digitizer, glass, and home button for about $50 - you'll have to look around. (Look here - iPAD touchscreen! So long, joystick buttons; hello, 10" glass touchscreen.)
Calamari over at Sparkfun said (Concerning the iPhone replacement touchscreen):
As you can see in the photos, there
are two B2B connectors. On one is for
the video. It has a 1v8 SPI bus to
configure the controller and a MPL
interface for the pixels. You can
drive the latter with a LM2506 and
that's fairly straightforward to
implement although the part is a
leadless LLP in its largest
incarnation. That interface gives you
18bit color.
The second B2B connector is to the
touch screen controller. Also 1v8 SPI.
During initialization, the touchscreen
and host exchange packets of about 80K
bytes which tends to rule out using a
smaller microcontroller.
During a touch, the touchscreen will
generate an interrupt every 16ms.The
host reads 8 bytes which include the
length of the payload packet. The
payload is 55 bytes for one finger, 83
for two, etc, and has a simple
checksum. On the iPhone, the host runs
it at a bit clock of 12 Mhz, but I
imagine slower would be fine.
As others have said, capacitive touchscreens, while nice, are much harder to work
with than resistive ones. Budget some space on your micro (ARM9 or better, probably - Can you handle 1024x768 data at 100Hz?) and PCB accordingly; don't expect to build an iPhone with your Arduino.
Nice project. Any conductor, even relatively weak ones, will do because the capacitance will be in series with either <1 ohm or 100 ohms+ and the resistance won't make a deal of difference. Water temperature, contaminant levels, salinity and eels may all conspire to give you a false reading though but good luck and you should get fairly decent reults. Do you plan to use the "capacitor" in an oscillator circuit?
One more thought - just in case the water physically touches the probes avoid any DC levels in case these give you "other" effects like killing an endangered species of blanket weed.
Best Answer
The type of liquid to be measured is important, since capacitance depends on the dielectric constant. Water, being a polar molecule, has a very high value and is easy. Something like octane much less so.
Assuming water, you need a large area for the electrodes to give you a decent capacitance especially when the fluid level is low. Maybe use concentric metal pipes, perhaps stainless steel since water is quite corrosive. Then treat the whole thing as an input capacitor to your microphone, feeding it with a high frequency signal, maybe 10kHz for starters and see whether you can pick it up.
Most of this is experimental physics, with the emphasis on "experiment"