Cannot svn update, An error occurred during decompression

This was never fully resolved, I worked around this by doing a clean checkout and migrating the changes to the new working copy.

This is not limited to Windows. I was having this issue on OS X, when trying to commit. I added the following to the client side ~/.subversion/servers, based on Nathan's answer about disabling compression:

[global]
http-compression = no

This resolved the problem.