Update Filtered lookup data in CRM 4.0

For this We have to pass fetch xml string using one of the parameters "search" recognised by the server otherwise exception is thrown (there is a way to disable parameters check through the registry setting
DisableParameterFilter, but it's easier without yet another undocumented setting).
Since we want to disable search functionality it makes sense to re-use search parameter.

Use the following code:

This line of code using for single entity
//The attribute where lookup is attached
var field = crmForm.all.pricelevelid;

// Ensure that search box is not visible in a lookup dialog
field.lookupbrowse = 1;
// Pass fetch xml through search value parameter
field.AddParam("search",
"<fetch mapping='logical'><entity name='pricelevel'>"
+ "<filter><condition attribute='name' operator='eq' value='pricelist name' /></filter></entity></fetch>");


This line of code using for multiple entity
//Lookup will show all the Child users of current loggedIn user

//Return all child users
var targetUserUnits = GetChildusers() //for eg: <value>"+Value1+"</value><value>"+Value2+"</value>
//The attribute where lookup is attached
var field = crmForm.all.new_userid;
//Ensure that search box is not visible in a lookup dialog
field.lookupbrowse = 1;

field.AddParam("search",
"<fetch mapping='logical'><entity name='systemuser'>"
+"<all-attributes/>"
+"<link-entity name='new_nesteduser' from='new_userid' to='systemuserid'>"
+"<filter type='and'><condition attribute='new_lft' operator='between'>"
+targetUserUnits
+"</condition></filter></link-entity></entity></fetch>");

Unsupported
You can manage it from lookup form means if this parameter contains any value then apply this filter otherwise use as origional.
to do this open the page "C:\Program Files\Microsoft Dynamics CRM\CRMWeb\_controls\lookup\lookupsingle.aspx " and change it accordingly as required.

For Eg.

void crmgrid_PreRender( object sender , EventArgs e )
{
// As we don't want to break any other lookups, ensure that we use workaround only if
// search parameter set to fetch xml.
<strong>if (crmGrid.Parameters["search"] != null && crmGrid.Parameters["search"].StartsWith("<fetch"))
{
crmGrid.Parameters.Add("fetchxml", crmGrid.Parameters["search"]);
// searchvalue needs to be removed as it's typically set to a wildcard '*'
crmGrid.Parameters.Remove("searchvalue");
// Icing on a cake - ensure that user cannot create new contact outside of the account
// and then select it.
this._showNewButton = false;
} </strong>
}