Since I'm on virtualbox I restored a pre-upgrade snapshot and tried
again. This worked for me:

1. Upgrade all packages that do not depend on grub-pc (or rather those that 
Synaptic would let me upgrade without upgrading grub-pc).
2. Upgrade only grub-pc and grub-common. This time a window popped up during 
the "Setting up grub-pc (1.98-1ubuntu4) ..." phase asking what to do with my 
existing (non-standard) /etc/default/grub. I chose to keep it and the 
installation completed successfully.

I presume that this window should have popped up during my previous
attempts to, but for some reason it didn't and the installer appeared to
hang while it was waiting for inputs from the window.

-- 
Setting up grub-pc (1.98-1ubuntu4) ... hangs
https://bugs.launchpad.net/bugs/560485
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