I can't comment yet.
Same as Kevin but with different UI step:
This may not be the exact answer for the OP, but is the answer to the Title of the question: How to Update Gradle in Android Studio (AS):
- Get latest version supported by AS: http://www.gradle.org/downloads (Currently 1.9, 1.10 is NOT supported by AS yet)
- Install: Unzip to anywhere like near where AS is installed: C:\Users[username]\gradle-1.9\
- Open AS: File->Settings->Build, Execution, Deployment->Build Tools-> Gradle->Service directory path: (Change to folder you set above) ->Click ok. Status on bottom should indicate it's busy & error should be fixed. Might have to restart AS