I’ve received several messages from people who try to install an update or a hack (for example Unicode Font Hack) and Kindle enters infinite install update-fail-reboot cycle. Some believe that the device is bricked. I also saw people posting on forums about similar problems. Good news is that if it happened to your device chances are it’s not bricked. All you need to do is put your device into Recovery Mode by holding “Home” button when the device boots up. Once in recovery mode, connect it to your PC via USB cable and remove the update_*.bin file that fails to install from the Kindle drive, unplug the USB cable and then press “R” to reboot the Kindle. It should boot normally. Once it boots you can make another attempt and installing the same update. Most likely you will not have the same problem.
It’s unclear what causes this problem. I saw it happening with hacks as well with official Amazon updates. Deleting and copying the same update will fix it. I can guess that there is some bug in Kindle USB disk related software and sometimes update file is not stored correctly which causes update unpacker to fail. Good way to test this theory would be to make a copy of the faulty update file from the Kindle drive when in recovery mode and compare it to the original. I’ll test it if I get a chance.