I doubt that avast has anything to do with this problem.
Unless you put Microsoft.com in the web shield, Customized, URL Blocking there is no reason why avast would block it as it isn't a firewall. If this had been all of the web then I would have said it could be a firewall blocking the web shield provider, however, since it only effects Microsoft I can't see it being that.
All I can suggest is checking the Security Settings in IE and see if it is somehow blocked, it (windows update) should really be in the Trusted Zone of the security settings.
If you haven't already got this software (freeware), download, install, update and run it, preferably in safe mode
Ewido Security Suite.
Also if you haven't got these.
1.
Ad-Aware2.
Spybot Search and Destroy3.
Spywareblaster Don't install this until you are clean.
There is some malware that tries to block windows update for obvious reasons
You also need a proper firewall and XP's isn't up to the job. Zone Alarm free
http://www.zonelabs.com works fine with avast and has a reasonably friendly user interface. There are others, Comodo, Jetico, Sunbelt Kerio, etc.
See some firewall tests for comparison, some are freeware but many are paid for versions
http://www.firewallleaktester.com/tests.php. Also see
http://www.thefreecountry.com/security/firewalls.shtmlAny malware that manages to get past your defences will have free reign to connect to the internet to either download more of the same, pass your personal data (user names, passwords, keylogger retrieved data, etc.) or open a backdoor to your computer, so outbound protection is essential.