How can I get the real password via hook_user_update()?
Implement hook_form_alter() (or one of it relatives) such that it array_unshift() a new submission handler to the user update form. The submission handler should add the password to the $form_state['values'] array. You also have to add the same key to $form_state['user'], because of the way user_profile_form_submit() calculates which keys from $form_state['values'] to pass as $edit to your hook_user_update() implementation.

If you did not insist on using hook_user_update(), I'd suggest handling your custom additions to the password update directly in your submission handler.

By the way, Drupal 7 does not use a simple MD5 hash to store passwords.