Here are some fixes for being stuck at/looping on "Updating System Files"
Go to Control Panel > Administrative Tools > Services
Scroll down and find “Secondary Logon”
Right Click > Properties
Change it from ‘Disabled’ to ‘Automatic’
Run your Diablo 3 setup as administrator and it should quickly go through Updating Setup Files and bring you to an install screen.
Right click on the Diablo 3 setup file you downloaded via the Blizzard Downloader
Select Properties > Compatibility > Check Run this in Compatibility Mode for… > Choose Windows XP (Service Pack 3) (Note: Does not work on Vista.)
Right Click the Icon, Run as Administrator.
Delete your C:\ProgramData\Battle.net folder.
Delete your C:\ProgramData\Blizzard Entertainment\Battle.net Cache folder.
Run the Downloader again, as administrator, and see if it gets past the “Updating Setup Files” window. If not, see Fix #1.
Alternate location: C:/Documents and Settings/All Users/Application Data
Application Data is a a hidden file so you'll need to click tools > folder options > view tab and check show hidden files and folders.
If still nothing search your computer for agent.exe and DELETE IT (if it's in a battle.net folder only)