Thats wierd. Same error at the same place .. Can not create file when it already exists.
It should just overwrite it ...
Honestly Im not sure how to get it to update, unless maybe you delete the file in question.
You may be able to delete the 2 files I mentioned earlier in the Steam folder to get the game to launch but ... think Id try to fix the DX issue.
Maybe someone else has seen this before and can offer some insight. Im a bit confused myself ..
I think at this point Id try deleting everything in the Temp folder, then doing a clean boot and try again. Troubleshoot Application Conflicts by Performing a Clean Startup
Im not sure why it would throw that error as it should just overwrite it, so it almost seem to me something is interfering.
Another thought would maybe be try the full redistributable version. Download: DirectX Redist (June 2010) - Microsoft Download Center - Download Details
And maybe ... try disabling UAC temporarily. But you shouldn't need to do this.