So I am uploading from/to the same machine (from d:\... to file://c:\inetpub\wwwroot\update\%file%). The port is 21, set the username, password and directory.
You can't upload to a "file://" path. You can only upload to ftp:// or sftp:// servers. If you want to "upload" to your local machine just copy the built update files to your "c:\inetpub\wwwroot\update\" folder on your machine.
One more thing, the next step is to upload to another machine, so please tell me how to upload to ftp://machinename/update/
You need to make sure the machine is running either an FTP or SFTP (aka SSH FTP) server on the machine. Then just add the site, click "Connect" to see if everything is setup correct, then click "Add site".