You don't use update.zip in the Nandroid - update.zip is used to perform an update using he now deprecated update.zip install method.
Read his directions a bit more carefully, I think you just scrolled down and started doing what it said without realizing what you were actually doing.
If you download a Nandroid then you use the Nandroid instructions.
If you download a update.zip file then you use the update.zip file.
Also, note what the requirements are for each type - for example, if you are currently not rooted, then you cannot use update.zip....