This worked for me:
Go to website: http://www.speedguide.net/downloads.php
Download and run the TCP Optimizer.
In the SG TCP Optimizer (Windows XP) dialog box, click on Optimal settings
at bottom. This opens the MTU box for editing.
Change the MTU setting from 1500 to 1472.
Click Apply changes and exit.
Reboot the computer and try Windows update again. Worked for me.