1. On a second 2.5" HDD, format it in Windows, or you can just initialize it. I initialized it because there's no point in formatting it in Windows when the PS3 itself will format it
2. Place the second HDD into the PS3 and turn it on. A screen will popup that will ask you to connect your PS3 controller via USB and press the Home button. Place your current PS3 firmware onto a usb flash drive and press Start and Select.
3. The PS3 will ask you if you want to format the HDD. Let the PS3 format it
4. The PS3 will reboot and show you the install screen. Cancel it
5. It will reboot again and show the screen that asks you to connect your controller via USB. Don't just yet
6. Take out the second HDD from the PS3 and insert the original HDD you used to update the PS3: the one that was stuck in the update loop
7. Connect the controller via USB
8. The same screen should popup from before: Home button to restart the PS3 or Start and Select to update it
9. Press Start and Select. It should not ask you to format the HDD and will say Preparing to update
10. It should get stuck at 0% for about 5 minutes or so and then resume updating until 99% where it will also be stuck. I don't know what happened after this because I went to the bathroom, but after I came back the screen had 'A serious error occurred' written on it
11. I pressed and held the power button on the PS3 until it beeped and then I turned it back on
12. After this it showed the XMB and asked me to change the display. Done
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