12 hours is obviously longer than it could possibly take--usually the process lasts seconds at longest. Even if the OS9 permissions repair didn't help (I'm assumning you've also run a regular "Repair Permissions", though I don't see why that'd make a difference), it still sounds like it might be having a problem creating a particular file.
If the log shows it having updated several things, then most of what needs to be changed probably already has been, and it's either sticking on some part of the upgrade or Classic is just freezing during startup. I'd assume that, were the latter the case, then it wouldn't try to update again the next time you start Classic, so it's probably freezing before it can update the final part of whatever in Classic needs to be updated.
And, frankly, if a fresh Classic and all the available Permission repairs don't help, reinstalling OSX is probably the only thing you can do in that case. You're not running any system modifications or hacks (interface enhancers, etc), are you? That could cause problems, so you might try uninstalling or disabling them temporarily to see if that helps. Unplugging any external devices can't hurt, either, but I can't imagine that being the issue here.
Two additional thoughts: You said you reinstalled Classic from scratch, and I assume that means the latest 9.2.x version without any old prefs. If this isn't the case, you might see if you can find a newer Classic install and/or disable any additions/temporarily move any prefs you've got in there.
Second, I seem to remember that some versions of the Quicktime DivX plugin can cause odd Classic issues under Tiger for some bizarre reason, so if you've got that installed maybe you should try removing it temporarily and see if that helps.