I've recently installed AVG Free 8.0. I know there's been a fair bit of controversy about this latest version, but - running under XP SP3 alongside Zone Alarm - I've had no problems (in the 2 days that I've had it!).
But... I recently downloaded Internet Explorer 7, and the installer advised that firewalls and antivirus should be switched off during the process.
I don't use IE7, however, when I want to download and install any item which suggests switching off AV and /or Firewalls, I disconnect my cable from rear of PC to Router - after saving the downloaded item to Desktop, from where I can then install it. Basically it is the Installation process that requires things to be switched off, not the download process! At least that is how I see it, and I have never had any problems with either process.
In Services I've got : Alert Manager Update Service Resident Shield Service and E-mail scanner all running
In Processes, I've only got avgcc.exe which is ticked in Startup in MSConfig. It loads the systray icon and the Control Centre program into memory.
You can close the Control Centre down or stop it starting up (untick in MSCONFIG)but you can still right click my computer and select Scan with AVG.
If you really want to shut all aspects of AVG down, go into Task Manager and disable all the above and anything else starting with AVG.
However, to "close all running programs" and "disable AV and firewalls" is a pretty standard message you get during most installation packages. It may not be actually necessary.
Personally, I would create a system restore point, then go ahead with the installation of IE7 and see if it succeeds or fails during installation. If it succeeds but IE7 doesn't work properly, restore then disable or stop all AVG items from (Windows Key+Run)Services.msc and see if you have more luck.