You get the “Error updating thumbnail” when you crop and NextGEN Gallery tries to save the thumbnail.

The solution is to set your permission to write (/over write) on file level.

If you are using DreamWeaver:
1) Connect via ftp to your site
2) On your server navigation down to your thumbnails (default in wp-content/gallery/galleryname/thumbs)
3) Select all your thumbnails
4) Right click and select Set Permissions…
5) Set values to 666