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When you get the first part of the downloader (wlSetup-web.exe) from Windows Live, (don't run it from the Server) save it to your hard drive so that you can right-click on it and select the "Run As Administrator" option.
Make sure you other security programs and third party applications are not interfering with the install.
Have you tried cleaning out your Temp folder, you can do it by typing %temp% in the Start Menu RUN box. This will open your Temp folder, there you can delete everything that Windows will allow you to do so.
It may be necessary to show Both Hidden and System Files, and also to uncheck "Hide known file types" in Control Panel/ Folder Options/ View, to navigate to the mentioned Temp location.
For anyone stuck on this issue, I solved it by manually creating an Installer folder under my Windows directory, and giving it Administrator permissions. I also had to turn off User Account Control to solve another problem, which may have also fixed this