I had this error with Firefox after the latest update to 3.05 on Windows Vista, I got it on my work machine but not my home machine which are almost identical. So what would happen is I get this dialog box saying "software update failed" then some rubbish about make sure another copy of Firefox is not running etc it then goes into a loop with no way out except to kill firefox.exe in task mananger.
After a lot of searching on the Internet I found lots of solutions, none of which worked for me, in the end I found a way around it, maybe this might work for you. Go to C:\Program Files\Mozilla Firefox or wherever Firefox is installed, right click firefox.exe and then select "run as administrator" say yes when asked if you want the program to run by UAC, then for me update.exe was able to do whatever it was it wanted to do and Firefox would start, you can then quit Firefox and start it normally, you just need to do the above once to get past the update error, et voila.