I finally managed to upgrade udev without breaking the system. If anyone is about to make this step - please read this post.
I upgraded all 3 packages: libudev,libgudev and udev to version 160-1
To make the system work I had to edit line 109 of /etc/init.d/knoppix-autoconfig. I commented out the original line:
/sbin/udevd --daemon && \
and added below it:
/etc/init.d/udev start 2>/dev/null >/dev/null

So far there are no side effects. FSTAB is recreated properly at every boot. pcmanfm mounts all drives-hard drives and usb
kl522 claims that upgrading udev does not break his system without the modification of knoppix-autoconfig, but unfortunately this is not the case here.
According to me the upgraded udevd fails to start in daemon mode using the original command included in knoppix-autoconfig. If any ill effects show up I will post them here