If you click restore it wont do a backup, if you click update and restore it should create a backup automatically, this is not always the case though, what can happen is the backup, sync or whatever maybe stopped by you or a glitch and the backup process never completes so a backup is never done.
So the answer is it should do, but its not worth risking it, always manually right mouse click on your iphone and select backup before doing an update.
If the backup fails on an update it usually doesnt tell you this has happened.
Also a backup will only backup camera roll, and phone settings, app saves, sms, email settings, etc. It does not backup your apps, music and videos, these need to be transfered to your pc with transfer purchases.