Why would UPDLOCK block selects? The Lock Compatibility Matrix clearly shows N
for the S/U and U/S contention, as in No Conflict.
As for the HOLDLOCK hint the documentation states:
HOLDLOCK: Is equivalent to SERIALIZABLE. For more information, see SERIALIZABLE later in this topic.
...
SERIALIZABLE: ... The scan is performed with the same semantics as a transaction running at the SERIALIZABLE isolation level...
and the Transaction Isolation Level topic explains what SERIALIZABLE means:
No other transactions can modify data that has been read by the current transaction until the current transaction completes.
Other transactions cannot insert new rows with key values that would fall in the range of keys read by any statements in the current transaction until the current transaction completes.
Therefore the behavior you see is perfectly explained by the product documentation:
SELECT * FROM dbo.Test WITH (UPDLOCK) WHERE ...
The real question is what are you trying to achieve? Playing with lock hints w/o an absolute complete 110% understanding of the locking semantics is begging for trouble...
After OP edit:
I would like to select rows from a table and prevent the data in that table from being modified while I am processing it.
The you should use one of the higher transaction isolation levels. REPEATABLE READ will prevent the data you read from being modified. SERIALIZABLE will prevent the data you read from being modified and new data from being inserted. Using transaction isolation levels is the right approach, as opposed to using query hints. Kendra Little has a nice poster exlaining the isolation levels.