Also how do you have your proxy setup (i.e., transparent or authenticated)
Also some more info (may or may not apply)
It is likely a due to a change in IIS for ASP.NET applications in how HTTP compression is handled that Microsoft implemented over the past couple of years on its servers.
When a browser makes a request through Squid it often does so using HTTP 1.1 … Squid, however, rewrites the request to use HTTP 1.0 (preserving other headers). In this case, the problem is that the browser requests “Accept-Encoding: gzip, deflate” which isn’t expected in an HTTP 1.0 request. In IIS 7 a configuration option of “NO_COMPRESSION_10” was introduced that disables compression for HTTP 1.0 requests and is enabled by default.
this can cause the request to just timeout with no response.
To fix this you’ll want to strip out that Accept-Encoding header from requests to Windows Update. Here is an untested example for squid.conf (milage may vary):