If the update will not install even when there is sufficient space available, then try clearing the cache - removing the temporary files on the Xbox might solve the problem. See http://support.xbox.com/en-GB/xbox-360/system/clear-system-cache
If that does't work, then try copying the update from a computer to a USB flash drive or CD/DVD and then install the update from there. See http://support.xbox.com/en-GB/xbox-360/system/system-updates-info
Let me know if that works for you?