Had the exact same issue with my White 2006 MB. Had to reboot into Lion Recovery Mode and load a Time Machine backup to get the Mac up and running again, on 10.7.1. Tried to update twice with similar results.
Any luck getting around this issue anyone?
Follow this hint. I had to run it twice before getting it to work, but it saved my hard drive and got me back up and running with 10.7.2.
Retrieving data ...