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Try to re-install Windows Update Agent. It looks the issue associated with the same. You can download the standalone installer from official site and run the setup. It will update that automatically. If this does not fix the issue I think you need to re-install all stuff back again. I am sure that WSUS is not at all buggy. You must one by one install Windows Update Agent in each and every client system. Then you can run Windows XP Update KB927891 and upgrade WSUS servers to a higher edition.
I am sure upgrades will fix the performance issue. I had never notice this in my system. And also there are very less chances that some bug can cause this. Hope your system has enough hardware resource to perform the action. If you want you can disable that and run updates manually. A number of hard drive activity also reduce the system performance to great extent.
Manual update remains the only option for this kind of issues. I am getting the same error and whenever the service is launched the cpu usage rises to quiet high. Upgrade also does not helped much here. The svchost issue is simply very annoying. I had updated WSUS but still the system is behaving in same way.