I was just running up against the same problem – trying to update WordPress plugins on WordPress 3.0 on XAMPP server installed locally and could not get past the ftp hostname, username, password combination.
Thankfully I came across this post – https://www.messaliberty.com/2010/04/how-to-fix-wordpress-automatic-upgrades-and-plugin-installs-on-xampp/ – and its now working fine for me (not requesting the ftp details). Had to muck around a bit with the file permissions on the file you have to change in XAMPP, but got there eventually.