I called the Microsoft support at the number provided by Ari and could speak with a tech who opened a remote session yesterday and took charge of my PC and he tried multiple options including registry, reinstalling WUP we spent 2.5 hours trying to install that update from hell and still wouldn't install.
At the end he gave me a case number and he ordered a Windows XP Professional SP3
installer CD for free so I can do a System File Checker or use the windows console to repair any damaged windows file or to do a non destructive repair using the CD.
Every single update that I downloaded and isntalled (like 12 since October 1)
were installed without a hitch except for this one mother....
My system seems to be OK it is working fine but when I receive the Windows CD I will run the sfc to see what happens.
I am attaching a screenhot of my update history where you can clearly see this update failed to install but with a difference: at the beginning 2 weeks ago when it failed to minstall the history showed "FAILED" with error code
0x80246007 (means NOT DOWNLOADED but I also tried to install directly from the microsoft website and even tried to run it without downloading it to no avail) BUT now it does not show "failed" anymore and NO error code, it just says "CANCELLED".