The log indicates that you've removed the grub-pc and grub-common
packages. Either install them again, or (if you've switched to a
different boot loader) remove the postinst_hook and postrm_hook lines
from /etc/kernel-img.conf so that the kernel packaging no longer tries
to run update-grub on upgrade.
This should no longer be a problem in Ubuntu 10.10, since we use a
different hook mechanism which is less prone to failures of this kind.
Here's the changelog entry from grub2 1.98+20100804-1:
* Add kernel hook scripts and remove any uses of update-grub as a
postinst_hook or postrm_hook in /etc/kernel-img.conf (closes: #554175).
Thanks to Ben Hutchings for advice and to Harald Braumann for an early
implementation.
** Changed in: grub2 (Ubuntu)
Status: New => Invalid
--
package linux-image-2.6.32-16-generic 2.6.32-16.25 failed to install/upgrade:
exit status 2 - Could not find postinst hook script [update-grub].
https://bugs.launchpad.net/bugs/536283
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