I was going back through your log and it eventually showed the problematic download as being downloaded and verified. Do not know if this is actually correct, but maybe just give it a chance. The literature on Windows Update states it might take 24 hours for the system to catch up.
Maybe just leave it alone for a while. Or if you decide, turn off automatic updates and check for them yourself using the Windows Update dialog window. Then make sure you check the box to allow download.
Just to keep you updated, I have been checking my systems, and on both, the 3rd download set (like yours) took many tries to download. Probably because it was the largest, but maybe something else was going on. This was on an x64 and x86 system, same symptoms.
Obtained through another website that was discussing this issue, there is Microsoft's KB article "How do I reset Windows Update components?" located at How do I reset Windows Update components? which might help. Going through the support steps it details some of the mentioned tasks in this thread so it might be easiest to just use the "Fix it" through IE.
Note: The KB article, while not for Windows 7 specifically, does contain details that would be appropriate.
I would recommend going down the route of re-installing/re-setting WindowsUpdate. The methodology for doing this has been well documented now, but was a lot easier in Windows XP. With that being said, it is important to mention that your system may run absolutely fine, but if there has been any corruption in Windows Side-By-Side or other components, Windows 7 SP1 will roll-back. This includes any problems discovered whatsoever when running System File Integrity Check (SFC /SCANNOW). If any files are found to be faulty in this arena using the command-line, you will not be able to install SP1, even if your system appears to be functioning normally. This is because the checksums don't match on files you may not even using - but would be part of a restore process if you lost drivers or encountered a DLL problem. This check is performed during the install process, but does not appear to be revealed to the end-user, and will prompt a roll-back over and over. To find out if this is the source of this problem, you should run sfc /scannow. Otherwise, it could be a corruption issue with Windows Update, under which case you should try repairing that datastore as well. Any kind of minor issue with operating system integrity, however nil, seems to prevent the install of the Service Pack.