What is happening is that the automatic update portion of Windows Update has gotten corrupted. Since your system is configured to use automatic updates, you are prevented from running them manually. You have a few options on how to proceed.
Option #1: Quick Fix
Start Menu -> right click My Computer -> Properties -> Automatic Updates tab
Turn Off Automatic Updates
Reboot.
Once the system has rebooted... select Windows Update from the start menu. When the updates load, install them manually. After they have all installed, verify that all updates are installed through Update History at the Windows Update website.
NOTE: This will turn automatic updates off. If a new update is released, it will not be installed to your system, until you run the updates manually.
Option #2: Long Fix (Permanent)
Please bear in mind that this is not for the faint of heart. You will be playing with critical system services. If another problem exists, this could result in the system being unrecoverable. Make sure you backup any critical files prior to attempting.
Verify Windows Update and BITS Service settings:
1. Click Start->Run, type "services.msc" (without quotation marks) in the open box and click OK.
2. Double click the service "Automatic Updates".
3. Click on the Log On tab, please ensure the option "Local System account" is selected and the option "Allow service to interact with desktop" is unchecked.
4. Check if this service has been enabled on the listed Hardware Profile. If not, please click the Enable button to enable it.
5. Click on the tab "General "; make sure the "Startup Type" is "Automatic". Then please click the button "Start" under "Service Status" to start the service.
6. Repeat the above steps with the other service: Background Intelligent Transfer Service (BITS)
Re-Register the Windows Update DLLs
1. Click on Start and then click Run, type: cmd and click OK.
2. In the command window type "REGSVR32 WUAPI.DLL" (without quotation marks) and press Enter.
When you receive the "DllRegisterServer in WUAPI.DLL succeeded" message, click OK.
3. Please repeat these steps for each of the following commands:
REGSVR32 WUAUENG.DLL
REGSVR32 WUAUENG1.DLL
REGSVR32 ATL.DLL
REGSVR32 WUCLTUI.DLL
REGSVR32 WUPS.DLL
REGSVR32 WUPS2.DLL
REGSVR32 WUWEB.DLL
4. Next stop the windows update Service by typing: “net stop WuAuServ”
Rename the Windows Update folder:
1. Click Start, Run, type: %windir% and press Enter.
In the opened folder, rename the folder SoftwareDistribution to SD_Old.
Restart the Windows Update Service.
1. Click Start, Run, net start WuAuServ.
Reboot system
Manually run Windows Update
Option #3: Wipe The Drive and Reinstall
1. Backup any critical files that must be kept.
2. Make sure you have all of the necessary drivers. At the least, have the network/modem drivers, so you can download the others after the install.
3. Format the hard drive.
4. Reinstall Windows.
5. Reinstall applications.
6. Restore critical files from backup.
Personally, option #3 is my preference, but I routinely perform a clean install at least every 6 months. Your preference may differ depending on experience, comfort level, etc. If you don't mind manual updates, option #1 may well be the best approach. Option #2 can be a daunting process.
Whatever you decide to do, good luck with it. Doesn't sound like a fun day.