Thought I'd share this solution that I was struggling with on our accountancy blog in trying to auto-update plugins when new versions are available.
Originally when I was trying this it would fail saying it couldn't remove the old plugin directory. It would then remove the plugin completely. Then you'd have to manually clean up the file system and download the new plugin.
The way around this is to FIRST MANUALLY DEACTIVATE the plugin that needs upgrading. THEN click on update.
The auto updater should then run though downloading, installing and activating with no problems. No need to mess around with the filesystem plugins sub-directories or anything.