When Google updated the Nexus S to ICS, they fiddled with the recovery mode a bit, such that it seems to have trouble installing official updates through the manual methods, at least for some people. Whether or not this was intentional on Google's part is hard to say.
Regardless, if you're getting the Status 7 error, and you're certain you're using the proper update file, it's likely because your recovery image was modified in the update to ICS. Unfortunately, your only options in this case are either waiting for your turn at the OTA or unlock the bootloader and flash a custom recover image to install the update.
Like what I had to say in this post? Check out more of my tech reviews and articles on Twitter: @QuantumRand