Pop, MS say that, if you've had all the updates freely available from them, you will effectively have Win XP SP3.
However, if you don't download SP3, even though you might reasonably see it as being superfluous, your computer will not 'identify itself' as having SP3 and may have problems with future sofware which requires a SP3 computer.
Quite why MS Update couldn't check your previous download history, confirm that you therefore have SP3 equivalence and send a small file to allow your computer to report itself as having SP3, I don't know.
I had no problems with one laptop; however, I used the very hepful MS 'remote assistance' to find and fix the problem which was blocking SP3 on the other laptop. Some 'registry permission' or somesuch geekery.
No problems at all with either laptop now - and both have all the latest MS Update software downloads.