where is your
</asp:Panel>
Close your panel tag and then try.
try
<asp:Button runat="server" ID="Button3" Style="display: none" />
<cc1:ModalPopupExtender ID="ModalPopupExtender1" runat="server" BackgroundCssClass="modal-bg" TargetControlID="Button3" PopupControlID="pnlModal" CancelControlID="btnClose" >
and on Button1 click event use
this.ModalPopupExtender1.Show();