For Mandrake Update to use your local source for updating it had to be added with a flag of --update. Software media manager assumes only the update mirrors get this and local files never get this flag.
To fix it you can skip the gui and add the local source at the command line. First remove the mirror and your local file using software media manager and exit. Then in a console as root enter a line something like the following:
urpmi.addmedia --update updates file://mnt/windows/updates/
Use your own names, the name updates is just the media name I use. I tested this and it worked on my machine.
Also, you're wrong about the update capabilities of urpmi. The following will completely update your machine after a clean install if you've added the right sources. (See
www.urpmi.org/easyurpmi.)
urpmi.update -a
urpmi --auto --auto-select