live update

I came across this while trying to accomplish the same thing recently- using a SetVariable string input as a live search that controls a drop down menu which updates on each keystroke. For anyone's future reference, you can hack your way into this behavior (it's not pretty but it ends up working and actually looks decent). It goes like this:

Upon clicking the SetVariable, immediately send focus back to the main panel and set a window hook that will detect mouse movements and keystrokes.

By using a window hook, each keystroke can be sent to the SetVariable to display, while also updating a menu. Don't use a normal popupmenu or even a contextual menu though, since it receives focus and will disrupt keystrokes. You have to fake the menu by printing out the list of menu items manually using DrawText. For it to look decent, I first display a group box sized according to the number of menu items, and print the items on top of it. It looks enough like a real menu for me. For mine, I also hook backspace/delete to gain that functionality over the string input.

For selecting something from the menu:

Using mouse move events in the hook function, you can detect the mouse location relative to the text (where each item has a known location) to record the user's menu selection on mouse down events. The selection can be shown live as a colored text item in the 'menu'. Alternatively, detect arrow keystrokes to toggle the selection up and down. On mouse down or a 'return/enter' keystroke, return the selected item from the fake menu, kill the window hook, and delete the text with DrawAction.

I'm pretty happy with how mine turned out, it lets me live search through probably a hundred different user-defined functions in my GUI very quickly without having to navigate through a popup menu with a bunch of submenus, and doesn't have very noticeable lag. 

see also here, where I used a notebook subwindow instead of a setvariable.