Try tuning the water effect a little and you may end up with something ok (but it will have a hard edge at the borders.)
This looks good, but it's a GPU killer due to the effect applied to the many fire sprites to create a nice ragged dynamic edge on top of the lava, perhaps something to inspire you to try something which has less perf impact than this example.
Fire.c3p
Thanks Mikal for your effort, This not exactly what I'm looking for but you made it quite good I got some idea how to use your logic in a diffrent way for fire, Thanks, Appreciated.