I have a similar issue, except that my Synaptic package manager does NOT
have proxy setup. My Update Manager still won't allow me to update.
However, I got a workaround, it may help those have similar issue.

If you, at a point, setup a proxy on browser, then disable it
afterwards. And now you found that you cannot updated through Update
Manager.

1. Remove the above proxy settings as mentioned above. 
2. If you still cannot use Update Manager. Open up Synaptic Package Manager, 
and try update here. (instead from Update Manager)
3. If (2) is success. Now, you should be able to run Update Manager for 
updates. 

for some reason, those "disabled" proxy values wont get reset
completely, without a run from Synaptic Package Manager.

-- 
Update manager tries to use a network proxy even though it's been disabled
https://bugs.launchpad.net/bugs/506063
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