This smells of something that should be done with a JOIN instead. Can you share the larger problem with us?
Hey, I should be able to get this down to a single statement, but I haven't had time to play with it further yet today and may not get to. In the mean-time, know that you should be able to edit the query for your inner cursor to create the row numbers as part of the query using the ROW_NUMBER() function. From there, you can fold the inner cursor into the outer by doing an INNER JOIN on it (you can join on a sub query). Finally, any SELECT statement can be converted to an UPDATE using this method:
UPDATE [YourTable/Alias]
SET [Column] = q.Value
FROM
(
... complicate select query here ...
) q
Where [YourTable/Alias]
is a table or alias used in the select query.