iTunes "Check for Update" button puts up a dialog box asking for a file
I am on Lion but had a similar problem. Based on info here: http://developer.apple.com/library/ios/#featuredarticles/FA_Deploying_iTunes/Introduction/Introduction.html , which says that 'the file selector dialog only appears only if automatic detection of iOS updates is turned off', I tried removing ~/Library/Preferences/com.apple.iTunes.plist.  

This fixed things for me.  Quit iTunes before you do this, and move the plist file somewhere so that you can restore it if necessary. (It may be possible to change this preference setting without messing with the plist; however, I couldn't immediately spot where to do it in the UI).