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I botched my previous install and tried to do a clean new install. I downloaded the latest beta2 image, and dd'd that onto a SD-card.

Initially I used the menu to update all available packages, this did not really go that well, as it kept saying there were updates available, and eventually it even froze.
I rebooted my pi and it booted into XBMC. So I ssh'ed in, exited the menu and tried to perform the regular
"apt-get update; apt-get upgrade". This did not work out so well.

@gobo

yes. you are doing "ok". simply the actual (by actual I mean the one on the image) version of dpkg, or dpkglibs or apt, or aptlibs or similar is not perfect. together with some parameters in /etc/sysctl.d/xbmc.conf (using memory to limit) can end up with this kind of error specially on 256MB models.

good part is that once you install newer version of dpkg* apt*, you are fine again and all works as should. mostly working steps are this:
1) remove /etc/sysctl.d/xbian.conf
2) reboot
3) try again
4) if still not, try creating /etc/sysctl.d/xbian.conf with only one setting
vm.min_free_kbytes = 16384
5) if 16384 still crashes dpkg, try 32768 or even 65536. (you have to reload setting from this file by "sudo sysctl -p /etc/sysctl.d/xbian.conf"

just update all packages available, xbian will even put back the deleted file and all should be working. there are some more details on WIKI we are rebuilding - but updates should be covered.