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The loop simply is caused by Steam seeing there is enough space to download the package/patch installer, but not accounting that there is not enough space to unpack and install it.
The error that is thrown blames a corrupt download or missing file (only if "launch when ready" is selected will it show), which led me to believe this was the reason.
It is not the case - I have tested it on other updates by pausing them and filling up the disk so that there is enough space for the download, but not an unpack and install.
The same loop occours.
If there is an install/validate loop - it is only a matter of clearing some disc space.
Appears that a 1.8gb patch requires more than 3gb space to download, unpack and install.
Apparently, it needed an extra 4mb only :)