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Is there a way i can create a terrain, and then add a water node to it and modify the area between the two to make it seem murkier and when actually under the water apply a fog like characteristic to it?
Fog is enabled on a per-node basis. The fog doesn't appear like normal real-world fog, it only appears between the camera position and the node that has fog enabled. You should do some experiments with the fog to see if it will do what you want.