I've had the same problem, but if you just let it run a while, it will finish. I think it is due to heavy load on the server. A lot of people receive virus warnings at the same time, and try to update manually.
Just as an aside, I've been using free AVG for over a year now, with no problems (except slow update downloads sometimes). It is a very good AV application.
I downloaded and installed free avg on my son's computer. Even though downloads of AdAware and ZoneAlarm transferred at 90 kbs on his DSL service, AVG transferred at only 10kbs. It appeared to download and install OK but when I tried to update the update screen had question marks where time left etc is. I uninstalled and reinstalled and got the same thing. Is AVG having trouble sending download of free program?