The behavior you are observing is expected, because RadAjaxLoadingPanel takes the size of the AjaxPanel that wraps the Ajaxified control. Which, if you had not set explicit sizes is taking the size of the Ajaxified control. So, if you wrap RadGrid in div with smaller size than the RadGrid, the loading panel will be with the same size as RadGrid. This behavior is by design.
However, you could set Width and Height properties of RadAjaxPanel and overflow style property to auto in order to achieve similar behavior without the over-sized loading panel.
I have created sample project to illustrate this approach.
the Telerik team
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