Please post the last page or so of \Setup\Setup.log (taken right after the update fails).
It’s possible that the error is actually unrelated to disk space (how much space do you have on the drive where the system %TEMP% variable points?)
I’d say this is more related to RAM/virtual memory than disk space.
Please try using the full VPS updater on the machine… hopefully the subesequent incremental updates will run again.
You are absolutely correct. It was a low VM problem. The manual updater didn’t do any good. Increasing the Pagefile size did the job. Thanks a million for your help.