Here's a quick walkthrough for VS 2005:
In your window titled "Solution Explorer", right click the folder "App_Data". Select "Add new item". When the dialog appears, select the SQL Database, and change the name from "Database.mdf" to whatever you want (I'm guessing MyDB.mdf). Click ok.
Go to a webpage you have (Default.aspx if you want), and drag a sqldatasource onto the page. A smart tag should pop up with "Configure data source", click that. If you didn't get one, or some how missed the option right click the sqldatasource, and select "Configure data source". A dialog box will pop up. It will ask what connection string you want to use. Select "MyDB.mdf" from the dropdown (Or whatever you called your database), and click next. Then it will ask you if you want to place the connection string in the web.config file. Leave the checkbox checked, and change the name from ConnectionString to MyDB (That's what you had before, but I usually leave it as ConnectionString).
Finish the wizard by telling it what you want to select from the database, or if there is nothing in the database yet, then just tell it to select something bogus for now, like "SELECT 1" as the custom sql string, click next, next, finish. The correct connection string is now in your web.config file.
To test that it is actually working, go ahead, and toss down a gridview on the page, tell it the datasource, and run the page. You should see one row, one column, with a "1" in it (Ok, there are actually two rows, the header row which should be called "Column1", and the data row). That verified that the connection string is working, you connected, asked for data, the data was returned and displayed.