Unable to restore stock OS on Nexus S
It's an official update, so the signature should be perfectly valid.  There are a couple things to check:


You didn't mention where you saved the update.zip.  Make sure it's in the /sdcard/ folder -- try viewing it via a file manager on your phone to ensure it's there.
I assume you've done this already, but make sure your bootloader is unlocked.
The download might have been corrupted.  Try the download again, and verify its validity with the MD5 sum (3e8908941043951da5a34bb2043dd1a0)
What's your specific model number?  Perhaps this update doesn't work for your model.

You can try this 2.3.6 for the GT-i9023 / GT-i9020t: http://android.clients.google.com/packages/ota/google_crespo/1ada25375426.signed-soju-ota-189904.1ada2537.zip
Or this 2.3.6 for the GT-i9020a: http://android.clients.google.com/packages/ota/google_crespoa/0b9c8148de0d.signed-sojua-ota-189904.0b9c8148.zip