Numerous sources have reported that KB3161606, an update rollup for Windows RT 8.1, Windows 8.1, and Windows Server 2012 R2 (WS2012 R2), are breaking the upgrade of Hyper-V VM integration components. This has been confirmed & Microsoft is aware of the situation.

As noted below by the many comments, Microsoft eventually released a superseding update to resolve these issues.

The scenario is:

You deploy the update to your hosts – which upgrades the ISO for the Hyper-V ICs You deploy the update to your VMs because it contains many Windows updates, not just the ICs. You attempt to upgrade the ICs in your VMs to stay current. The upgrade will fail.

Note that if you upgrade the ICs before deploying the update rollup inside of the VM, then the upgrade works.

My advice is the same as it has been for a while now. If you have the means to manage updates, then do not approve them for 2 months (I used to say 1 month, but System Center Service Manager decided to cause havoc a little while ago). Let someone else be the tester that gets burned and fired.

Here’s hoping that Microsoft re-releases the update in a way that doesn’t require uninstalls. Those who have done the deployment already in their VMs won’t want another painful maintenance window that requires uninstall-reboot-install-reboot across all of their VMs.

EDIT (6/7/2016)

Microsoft is working on a fix for the Hyper-V IC issue. After multiple reports of issues on scale-out file servers (SOFS), it’s become clear that you should not install KB3161606 on SOFS clusters either.