Update manager doesn't update modules: "Archivers can only operate on local files" error

Changing issue title because with RC3 the update process doesn't stop at Preparing to update, but it does result in this:

Archivers can only operate on local files

when I try to install a recommended module update.

Adding a post script. I did a clean install of RC3 to make sure. Back to not getting beyond Preparing to update. Can't cause #1 to happen again.

engine = On
zend.ze1_compatibility_mode = Off
short_open_tag = On
asp_tags = Off
precision = 12
y2k_compliance = On
output_buffering = Off
zlib.output_compression = Off
unserialize_callback_func=
serialize_precision = 100
allow_call_time_pass_reference = On
safe_mode = Off
safe_mode_gid = Off
safe_mode_include_dir =
safe_mode_exec_dir =
safe_mode_allowed_env_vars = PHP_
safe_mode_protected_env_vars = LD_LIBRARY_PATH
disable_functions =
disable_classes =
expose_php = On
max_execution_time = 90 ; Maximum execution time of each script, in seconds
max_input_time = 60 ; Maximum amount of time each script may spend parsing request data
memory_limit = 96M ; Maximum amount of memory a script may consume (16MB)
error_reporting = E_ALL & ~E_NOTICE
display_errors = On
display_startup_errors = Off
log_errors = Off
log_errors_max_len = 1024
ignore_repeated_errors = Off
ignore_repeated_source = Off
report_memleaks = On
track_errors = Off
variables_order = "EGPCS"
register_globals = Off
register_long_arrays = On
register_argc_argv = On
auto_globals_jit = On
post_max_size = 8M
magic_quotes_gpc = On
magic_quotes_runtime = Off
magic_quotes_sybase = Off
auto_prepend_file =
auto_append_file =
default_mimetype = "text/html"
doc_root =
user_dir =
enable_dl = Off
file_uploads = On
upload_max_filesize = 20M
allow_url_fopen = On
allow_url_include = Off
default_socket_timeout = 60
[Date]
[filter]
[iconv]
[sqlite]
[Pcre]
[Syslog]
define_syslog_variables = Off
[mail function]
SMTP = localhost
smtp_port = 25
[SQL]
sql.safe_mode = Off
[ODBC]
odbc.allow_persistent = On
odbc.check_persistent = On
odbc.max_persistent = -1
odbc.max_links = -1
odbc.defaultlrl = 4096
odbc.defaultbinmode = 1
[MySQL]
mysql.allow_persistent = On
mysql.max_persistent = -1
mysql.max_links = -1
mysql.default_port =
mysql.default_socket =
mysql.default_host =
mysql.default_user =
mysql.default_password =
mysql.connect_timeout = 60
mysql.trace_mode = Off
[MySQLi]
mysqli.max_links = -1
mysqli.default_port = 3306
mysqli.default_socket =
mysqli.default_host =
mysqli.default_user =
mysqli.default_pw =
mysqli.reconnect = Off
[mSQL]
msql.allow_persistent = On
msql.max_persistent = -1
msql.max_links = -1
[OCI8]
[PostgresSQL]
pgsql.allow_persistent = On
pgsql.auto_reset_persistent = Off
pgsql.max_persistent = -1
pgsql.max_links = -1
pgsql.ignore_notice = 0
pgsql.log_notice = 0
[Sybase]
sybase.allow_persistent = On
sybase.max_persistent = -1
sybase.max_links = -1
sybase.min_error_severity = 10
sybase.min_message_severity = 10
sybase.compatability_mode = Off
[Sybase-CT]
sybct.allow_persistent = On
sybct.max_persistent = -1
sybct.max_links = -1
sybct.min_server_severity = 10
sybct.min_client_severity = 10
[bcmath]
bcmath.scale = 0
[browscap]
[Informix]
ifx.default_host =
ifx.default_user =
ifx.default_password =
ifx.allow_persistent = On
ifx.max_persistent = -1
ifx.max_links = -1
ifx.textasvarchar = 0
ifx.byteasvarchar = 0
ifx.charasvarchar = 0
ifx.blobinfile = 0
ifx.nullformat = 0
[Session]
session.save_handler = files
session.use_cookies = 1
session.name = PHPSESSID
session.auto_start = 0
session.cookie_lifetime = 0
session.cookie_path = /
session.cookie_domain =
session.cookie_httponly =
session.serialize_handler = php
session.gc_divisor = 100
session.gc_maxlifetime = 1440
session.bug_compat_42 = 1
session.bug_compat_warn = 1
session.referer_check =
session.entropy_length = 0
session.entropy_file =
session.cache_limiter = nocache
session.cache_expire = 180
session.use_trans_sid = 0
session.hash_function = 0
session.hash_bits_per_character = 4
url_rewriter.tags = "a=href,area=href,frame=src,input=src,form=,fieldset="
[MSSQL]
mssql.allow_persistent = On
mssql.max_persistent = -1
mssql.max_links = -1
mssql.min_error_severity = 10
mssql.min_message_severity = 10
mssql.compatability_mode = Off
mssql.secure_connection = Off
[Assertion]
[COM]
[mbstring]
[FrontBase]
[gd]
[exif]
[Tidy]
tidy.clean_output = Off
[soap]
soap.wsdl_cache_enabled=1
soap.wsdl_cache_dir="/tmp"
soap.wsdl_cache_ttl=86400

I have it working now, on Drupal 7. In my case, I was running on my own linux box, so I needed to install proftpd so that I was running a FTP server. The 7.0 release, unlike the alphas and betas, pops up a page for providing ftp credentials. Once I had ftp installed with a user with the proper permissions (Drupal needs to be able to delete files, add directories, etc.) and pointing to the Drupal root of the domain, the updates/new installs work like a charm.