It really isn't an either/or proposition. These 2 tools perform what appear to be somewhat similar but in truth are 2 totally different functions.
Windows Update does merely that. It scans the operating system of Win98/2K/XP computers (but not NT) and compairs what it finds against a database on an MS website to determine if ANY updates (not just security related) are available for the OS. If so it give you the opportunity to download and install these updates. It does no security analysis of any kind. It merely determines the presence or absence of a given update.
MBSA is a security tool. It scans the computer on which it is installed for a wide range of security related settings. It not only scans the OS but other applications with known security problems (IIS, IE, SQL, Office). It also detects the presence or absence of security related updates by comparing what it finds against another database provided by MS. However, all it does is scan and provides a report of what it finds as well as recommendations based on what it finds. However it doesn't (appear to) provide any download or installation capabailities for any available updates.
Hope this helps.