Are you referring to Windows 7 SP1? Although 360 should not be blocking the install, you can try disabling it for the install.
As long as you have the SP1 already downloaded, you can disconnect from the internet, either by turning off Wifi, or physically disconnecting the ethernet cable. Then disable Smart Firewall and Anti Virus Autoprotect. Choose to disable until system restart.
Then run the SP1 installation. When the system is restarted, your 360 will be running again.
If this still does not help, you will need to search a little more to find other reasons why the installation fails.