I currently have a Windows Phone 7.1 (Mango or 7.5) and want to know if I can update it to the upcoming Windows Phone 8?
Microsoft announced an update will be available for current Windows Phones. The update will be named Windows Phone 7.8. There will be no way to fully update your device to Windows Phone 8.
Also, the update will be sent out using the Over the Air technology.
UPDATE Windows Phone 8.1 is now available to the public via an OTA update as part of the Preview for Developers program.
You can only do this update from an 8.0 device, this is a great WPCentral article highlighting the new OS and how to get it
Win10 Mobile UPDATE - (March-2015)
Now that a new version is available, there may be questions of "Can I go from WP7 to WP10", unfortunately this will not be supported for Windows Phone 7.x devices. . You can now get a preview of Windows 10 Mobile (the next version of Windows Phone). It's relatively easy to install, but is limited to a few devices right now Go here to read the FAQ and installation instructions.
A word of caution, I recommend not updating your phone until the build has become a little more stable, however I totally recommend putting in on a spare phone or go buy a throw-away Lumia 635 for $50 to install it on.
You cannot upgrade a Windows Phone 7.x device to Windows Phone 8. This can be confirmed by a post in the Nokia Forums.
The Lumia 610 was launched as a Windows Phone 7 device. Windows Phone 7 is based on the Windows CE architecture (CE stands for Compact Embedded- this was an operating system that Microsoft deployed to embedded systems such as mobile phones).
Unfortunately, shortly after Windows Phone 7 was launched, Microsoft went down the route of unifying all of it's platforms (desktop, phone, etc.) and hence the next version of Windows Phone i.e. Windows Phone 8 was not based on Windows CE but on Windows NT (just like the desktop Windows 8). This is why Windows Phone 7 devices cannot run Windows Phone 8 OS (different architectures).
To appease buyers of Windows Phone 7 devices, Microsoft released Windows Phone 7.8 as the final update to Windows Phone 7 devices.
If you haven't already upgraded to this version, take a look at this page by Nokia.