1. Hopefully clearing the DNS cache will have helped.
Avast uses a lot of servers to provide updates, there is a list in your C:\Program Files\AVAST Software\Avast\setup\servers.def this file can be viewed using notepad and you can get an idea how many there are. So resolving the DNS could mean a server is busy and another in the servers.def file is tried.
2. The Windows firewall in XP provides inbound protection only, not outbound protection, so that shouldn't have been the problem.
3. Setting it to Automatic, could well see things improve over all, however doing the odd manual update shouldn't take long if your current VPS version is pretty recent.
4. I rarely see the instup.exe (it shouldn't be there long), mainly as I only open the task manager to troubleshoot. I just did a manual update and the total time taken was 17 seconds (of which 1 sec was the download). I do however have a relatively quick internet connection.