From AVG's forum dated 7 Nov, 2008:
Our technology department is currently working on improving one of the main servers responsible for providing updates of AVG Free Edition. This maintenance may have, under specific circumstances, effect on availability of update files on our servers. Backup systems, which are now in charge of providing updates, may be from time to time overloaded with customer requests and we are doing our best in order to improve their function to remedy this issue. If you encounter issue with “Update failed”, please retry in a few minutes to update AVG manually (open AVG User Interface, click the “Update now” button).
We are sorry for any inconvenience this may cause. In a week time, new improved update servers should be available.
Although the server must not be running at 100% because I still have to update manually.