Solution : Windows XP stores the update downloads at following location. By deleting files from here you can free up the space.
C:\Windows\SoftwareDistribution\Download
Also you can create a batch file so that you just have to click on it & it will delete the folder contents whenever you want to delete. Copy & paste below code into a notepad, save it as "delete_windows_update_files.bat"
CD\
CD %Windir%
CD SoftwareDistribution
DEL /F /S /Q Download