I had the same problem but got it to work.
Step one: fire up AVG and click on Update Now.
Step two: when the list of updates is shown in the popup window, click on the link to tell you more. This will take you to a list of the updates you're trying to, well, update.
Step three: click on and save to your computer the all updates except the last one -
http://downloadfree.avg.com/update/u7iavi1616oo.bin - because it isn't there.
Step four: cancel the update.
Step five: instead click on Tools->Update from Directory and browse to wherever you downloaded the file.
It should work from there.
HTH,
John Anderson
Soaring Penguin Ltd.
PS. Tell your friends.