The above error refers to Proxy Authentication

If you’re receiving the above error within your Windows Updates log whilst your server/pc tries downloading from your WSUS server, then the issue is possibly proxy related.

Try bypassing proxy for your wsus server and give it another go.

You could also try changing the WSUS name within Group Policy from http://wsusservername.domain.local to http://wsusservername

Also make sure your proxy server or firewall is configured for anonymous access to the Windows Update website. Include the following URL’s when you create a destination or url set.

Always test such changes before applying to a live environment.