|Ugh. I had this last night. As you realised, it's not a genuine Windows alert, but an attempt to con you into downloading malware. So first, don't download the stuiff it's telling you to.|
It took me a fair bit of searching to find the solution for this, but mercifully it's really quite simple to remove manually (interestingly enough, neither Ad-Aware or MB Anti-Malware picked up the problem when scanning).
Removal (For XP, the directories may be different for other OS's, so you might have to do some digging if you're not on XP)
1. Go to C:\Documents and Settings\<YOUR USERNAME>\Application Data\Google
2. In there you should see two files, one an .exe and the other a .dll. The actual filenames are randomly generated I believe
(mine were called ocboo1892823.exe and sysspc.dll, for example). Depending on whether you have any genuine Google apps such as Google Earth or Google Toolbar installed you might also have a couple of sub-directories in there as well, but you can ignore those. We're concentrating on those two rogue .exe and .dll files.
3. Since the process is currently runnning on your machine, Windows probably won't let you delete the files, so you need to write down the names (you'll need this in a minute as well) reboot in Safe Mode (or Safe Mode Command Prompt if you're paranoid like me ;), navigate to the aforementioned folder and delete those two files, the .exe and the .dll. Quit safe mode and reboot into normal Windows again.
4. Go to Start> Run> regedit to open the Registry Editor. In the Registry Editor, go to Edit > Find and search for the filename of the malicious .exe file you just deleted (this is why you just wrote them down). You can safely delete any registry key that refers to it. Don't forget to press F3 to keep searching after you delete each instance, until you get the message "Finished searching through the registry". Repeat for the other file (the .dll). Once this is done, you should be all clear, but it's still worth rebooting and running full anti-virus and anti-malware scans on your machine.
Hope this helps.