Have a read here http://forums.macrumors.com/showthread.php?t=466996 for a solution.
The out of space (or 4MB needed) error message is because the SP3 updater wants to install it on your OSx partition, which luckily he cannot access.
The registry fix leads the way to your XP partition.
Anything non-essential connected during the update ?
Like external harddisk, printer, scanner, etc.
If so, disconnect prior to starting the update.
Run a CHKDSK http://www.microsoft.com/resources/documentation/windows/xp/all/proddocs/en-us/c hkdsk.mspx?mfr=true before attempting the next update.
Maybe some error turns up.