We had some timber frame double glaze windows installed last year. They were screwed into place in the recess (on the outer of the cavity) and the gap was then filled with expanding foam. Later, the excess foam was cut away and silicone caulk and flashings completed the outside while new sills and reveals go on the inside. Tight as a drum. That expanding foam is great for this job, because it fills the gap and insulates as well.
I know what you mean hearing the stuff from outside as if the window is open. I've filled a heap of gaps in some other windows using that white poly roll they sell at bunnings - it comes in several sizes, I just pushed it into the gaps and it seems to work great.
woodbe.