Microsoft decided that pushing it as an auto-update to everyone at once would put too much of a load on the servers, particularly when there are other priority updates that need to be downloaded, so they are sending it out to users in groups. The primary breakdown is by region, but there are other factors as well. Thus, the error message translates to "Microsoft's servers cannot accommodate you at this time. Please try again later."
You can download IE7 from Microsoft's website manually if you want, which will remove you from the Automatic Updates 'waiting list.' There are some serious issues with IE7 but the majority have not encountered them, so you could give it a shot and if you're not satisfied uninstall it and revert back to IE6.
Hope this helps,
IE7 has been sitting in Microsoft Update as a priority update for some weeks. Most of the people I speak to have now been offered IE7 as an auto update but I haven't. Why? I have just received five auto updates being this month's offerings so auto update seems to be working. I could download it manually but I am not even sure that I want IE7 in view of the problems some are experiencing. I would however like to know why IE7 is not downloading automatically.
In C>Windows>WindowsUpdate.log. There is a recurring notice that says - Update is not allowed to download due to regulation - Is this something to do with the problem and what does regulation mean?
I have XP/SP2.