I created a WCF service library project in my solution, and have service references to this. I use the services from a class library, so I have references from my WPF applic
I experienced the same error. I struggled for almost a day trying to find out what was going wrong. The clue for me were the warnings that VS was throwing. It was trying to do some kind of mapping to Yahoo.Yui.Compressor.dll, a library I had added and removed (because I decided not to use it) a couple of days before. It was shocking because the library wasn't there, but somehow it was trying to reference it.
Finally, I restore this dll from the Trash, and then I could update my service reference successfully.