This is more of an answer than a question but hopefully it'll help all those poor souls who, like me have been trawling around trying to find an answer to this problem where a dialogue box pops up with the dreaded svchost.exe application error and then locks up the computer if you click the OK button.
Sounds familiar? Well I've had this in the past and have only partially managed to get rid of it (repeated reboots eventually allowed me to boot without getting the error). This time however it was happening every time.
I eventually tracked the problem down this time to the Google Updater and the location where the automatic updates are saved to because it uses BITS to download those updates. I know this problem is also associated with WindowsUpdate and with another automatic updating service (Adobe I think). It seems that the folder where the BITS (Background Intelligent Transfer Service) service downloads to needs write permission (not surprisingly) and sometimes that permision can get turned off (i.e. to read only).
So I went to this location, allowed it write permission, and hey presto - end of problem!
Here's a link to the Google page which explains how to fix the problem in more detail (it's near the bottom at the final bullet point):http://www.google.com/support/installer/bin/answer.py?answer=96616
I think this will help a lot of people, not just those with Google Update problems, but those with Windows Update and Adobe too - probably other background update downloaders too - I bet they all use BITS to download the updates silently.
It's a real easy fix; no software to download, no poking around in the registry, no copying of system files. Why didn't anyone find this before?