Whatever settings I use, clicking on the fullsize watermarked image brings up lightbox with the image with no watermark. Obviously this makes watermarking the image pointless as people can save it from lightbox. Is there a way to solve this?

Also can I make a thumbnail for a video manually? Otherwise there is no way for people to know what a particular video is in the gallery (default template) as there is no thumbnail or title just a default 'filmstrip' thumbnail.

You should try the nightly because of some watermark fixes. Generally, people who really want will always be able to save an image as they technically already have when viewing it. Best is not to upload real printable fine data to avoid unwanted usage.

Regarding video thumbs: http://www.zenphoto.org/2009/03/troubleshooting-zenphoto/#19

Thanks! That solves the video thumbnail problem.

I don't really mind people saving the image if it's always watermarked as that makes it more difficult for them to use it in various ways. For now the easiest thing might be to create them that way in the first place in Photoshop. But I'll give the nightly version a try too.

None of the distributed themes place the full image in a lightbox, so you will have to address this in your theme.

Not exactly, zenpage-default does that using Thickbox which is a kind of variant actually.