Should one update a manuscript to current state-of-art when re-submitting?
Yes, you should update your references at every possible opportunity.  Whenever the manuscript is in your hands, if it is possible for you to update the references, you should do so.  Paper rejected?  Update the references before resubmission.  Paper accepted?  Update the references before sending back the revision.  Multiple rounds of reviewing?  Update the references after each round.  Submitting a journal version of a conference paper?  Update the references before submission.  Reviewing galley proofs?  Okay, then you probably can't update the references.

Your paper serves as not only a description of your new result but also as a guide to the surrounding literature.  Your readers (including referees and editors) are best served by the most up-to-date snapshot possible.

Of course, if one of the papers you cite has undergone a revision (for example, and ArXiv preprint has appeared in a journal), you must read the new revision yourself to make sure that the cited information is still there, so that you know how to appropriately cite it.

I typically tag completely new references (for example, a relevant ArXiv preprint appears while my paper is under review) with phrases like "Since this paper was submitted..." or (since I'm in computer science) "Since the preliminary version of this paper appeared...."