After searching the web for hours and trying all the registry hacks and reinstalling the Windows Update Agent and renaming the software distribution folder and reregistering the windows update dll and reinstalling IE7 and trying the alternative update sites for Firefox (but that only work for 32 bit XP, I have 64 bit XP) and and and I tried a new admin account and that worked fine. So there must be something wrong with my regular user account.
More out of utter desperation I started poking around in the IE7 security settings and found under Tools > Internet Options > Advanced a section at the bottom of the Advanced tab that resets all IE settings. I clicked on Reset, restarted IE7 and since then don't get the Admin only V4 Windows Update problem.
I guess I mention the fix in case some other lost soul tried everything as I did.
Leaves only one thing to say: Thank you Microsoft!
