I've found a solution to this problem on Microsoft's Support website. It took me a long time to find it so I thought I'd register here (this forum) and post the findings for everyone.
http://www.microsoft.com.nsatc.net/communities/newsgroups/en-us/default.aspx?dg=microsoft.private.security.spyware.appcompat&tid=f50cd181-a525-4ebc-985f-9d2267ce412b&cat=en_US_d02fc761-3f6b-402c-82f6-ba1a8875c1a7〈=en&cr=&sloc=en-us&m=1&p=1
Read the thread to the very end. Bill Sanderson from MS describes some steps to edit the registry to fix the downloading problem. The culprit was found to not be only AVG but any number of anti-virus software that may have been installed in the past and has left a registry which in turns stuffs up the whole system. Good luck and I hope it helps.