Yes it will, it'll leave a white residue and, yes, you will have to wipe it off.  Dampen a cloth with water and wipe it off.  You may have to repeat that a couple of times.  I usually wipe it down afterwards with a clean dry cloth.

Mark,

I visited your blog, your project looks outstanding. you are very close to getting that boat in the water. nice work. wet sand, wipe clean, varnish, then repeat.

we just finished our MC16 and put in @ Vancouver lake and Lacamas Lake last weekend. great fun. hope to see you out on the water sometime.

Jon & Maryjane in Vancouver, WA.

Glad to see your stained deck. Looks fantastic. How much stain did you end up using?

Critical step!!!!! be sure to not let the sanding slurry/ residue dry out, wipe it off as you go with water constantly, we have seen many sanding jobs that were not carefully cleaned up that the residue dripped and ran and then dried up it always shows thru and is very hard to remove if it dries

Do not let it dry on the boat check all surfaces for residue before walking away

cfoxwoodboats.com 

Thanks for the tips on cleaning up the sanding residue, I left mine on there, hopefully not too long. 

Does anyone have any experience/thoughts on roughing up the varnish coats with steel wool rather than wet sanding?

I've used steel wool for cabinet projects but I wouldn't use it for a boat because of the chance of little bits of steel hanging around and rusting. A scotchbrite scouring pad will work without leaving metal residue.

And speaking of residues, I'm not sure what the problem is with letting the slurry dry out. Of course if you leave it on and varnish over it it'll look bad, but dried residue can always and easily be converted to wet residue simply with the addition of plain water. My SOP is to completely wet sand the work (by which time the stuff at the beginning has completely dried), then go back and wash the whole thing clean. I do this in the shop and the water on the floor keeps the dust down.

Once the work is washed and dry, I wipe it down with a lint-free cloth and then a tack rag. Tack rags are bad when epoxyinging (since they contaminate the epoxy) but are OK for varnish.

Have fun,

Laszlo

Lazo's comments on steel wool are right on do not use steel wool on boat projects as moisture does travel thru varnish and paint to some extent liitle rust spots usually show up under the varnish or paint  the modern scotch bright pads are excellent but many still prefer Bronze wool as they have used steel wool in the past and are comfortable with the system as to letting the slurry dry after building,varnishing wood boats for 32 yrs and learning to finish from some of the best finishers in the world as an apprentice in our experience the slurry created by wet sanding does not all come off without serious scrubbing if it has dried although it may appear to be gone and may not show as really ugly spots or drip lines in your finish it will muddy up your varnish and if you were to set your work next to a boat that had been properly cleaned you could tell the difference almost 100% of the old pro's will tell you get it off before it dries

so why skip a simple step a miss a little bit of slurry and after a whole lot of work and care building and finishing your little yacht be frustrated by one little flaw that could easily have been avoided

cfoxwoodboats.com 

I just did a little dry sanding with the Scotchbrite scour pad and I need to clean off the hull again. Is it okay to use lacquer thinner to remove the fine varnish dust or should I stick with the water rag method?

My thought - why use a smelly toxic chemical when plain water works so well?

the great thing about wet sanding a boat is that its a boat, and its ok to get wet. during the varnishing stage of my MC 16.5 i had it propped up on a rolling tool bench and would move it out onto the driveway and sand and use the hose to wash off the slurry, made quick work of it. I used a clean bucket of water and a sponge. then one of those microfiber towels to finish. then roll it back in for another coat of varnish. it took me about the 4th coat to really get the hang of how to apply, after 8 coats i had the "floating coffee table" look.

jon