I went through this with a client's system about a week or two ago. Restored the HP P4 desktop with the original burned 8-CD restore set. It was XP SP1. I then installed SP3 off of a CD I had. Then I tried going to WU, and it sat there searching "forever", with SVCHOST.exe taking up 99% CPU time.
I had to google for the problem, and got led to a MS "Fix-It" link, for WU problems on XP.
I then had to disable "Automatic Updates" service, in order to get anything done.
I installed the Fix-it, and it required Net 2.0 or higher. I clicked the link it showed, to download Net 3.5 SP1, but it was a network installer. It would constantly time out before I figured out how to disable "Automatic Updates". In fact, the first time, I tried using a standalone Net 4.0 installer, but that wasn't recognized by the Fix-It. Anyways, with Net 3.5 SP1 finally installed, running the Fix-It again, downloaded and installed PowerShell. With that installed, then it did its magic. It said that it repaired Windows Update components. It then prompted me to test what I was attempting to do that wasn't working. Well, that didn't work the first time I tried it. So the second time around, I rebooted first.
Then Windows Update started working normally.
I do agree with your premise, I think MS somehow intentionally borked XP so as to not be updatable, forcing people to upgrade to 7 or 8. I mean, that tactic is classic MS.