This is an old post, but new installs of AC on XP SP3 still get this issue. AC installs an old 2002 version of MSXML4.dll etc. Windows update tries to install the MSXML4 service pack and either fails or the install is corrupted. The SP2 will then keep trying to reinstall, driving everyone crazy. See
http://forums.techarena.in/windows-update/1080894.htm
Doing the fix for this problem from MS
http://support.microsoft.com/kb/941729/
also does not always work, because after renaming MSXML.DLL to MSXML.OLD, the Windows Update will not find MSXML4 at all and will not offer the SP2 update at all. If AC is relaunched in this situation, it will reinstall the moldy old MSXML4.dll from 2002 again, and you are back where you started.
The only solution is to remove the MSXML4.DLL and MSXML4R.dll files from the system32 folder by hand (or better - rename them with .old), download the KB954430 update directly (not using Windows update), run it, and do a repair. This will install the new (2009) versions of MSXML4.dll and MSXML4R.dll. AC, when launched, will find the new MSXML4 version and fuss about it by checking database integrity. But once it gets done, you are in business and more secure, since you will have the updated KB954430 MSXML4 SP2 installed. The repeated prompts to reinstall this service pack also go away.