Could not create directory

As the message says, WordPress was unable to create the /upgrade/wordpress-3.tmp directory while performing the upgrade. You might try making the /wp-content directory writable for WordPress (0775 or maybe 0777 ?) and then doing the update again, then change the permissions on the /wp-content directory back when you’re done. Just a guess, mind you.

As always, make sure you have complete file and database backups prior to doing any updates/upgrades.