Reference: http://codex.gallery2.org/index.php/Gallery2:faq#How_to_upgrade_Gallery2.3F

This is exactly what I did and went perfectly well.

1) Backup MySQL DB and g2 data directory and current G2 app files.

2) Download full install unzip over existing. Keep the existing config.php in place, this should not be an issue since a new install should not contain one)

3) Disabled the current gallery module from within Drupal

3) Clear accelerator cache

4) Open your Gallery 2 in your web browser should take you to the upgrader automatically.
Reference: http://codex.gallery2.org/index.php/Gallery2:Upgrading_to_2.1.x#Run_the_web_based_upgrader

I got 2 warning:
Warning: Output buffering is enabled in your php by the zlib.output_compression parameter(s) in php.ini. Gallery can function with this setting - downloading files is even faster - but Gallery might be unable to serve large files (e.g. large videos) and run into the memory limit. Also, some features like the progress bars might not work correctly if output buffering is enabled unless ini_set() is allowed

I download the generated cleanup.bat file ( a file that you should later execute on the server to erase older unused files).

5) Since I use "cleanURLs" copied .htaccess changes by hand see article: http://www.sitebuddy.com/drupal/gallery_module_also_called_gallery2_module

6) Uploaded and execute cleanup.bat from the install folder of G2.

7) Delete the old module files, and installed the new drupal module for Gallery 2.1

8) Configure the Gallery 2.1 module from within Drupal.

Note for future updates: 2.1+ has a maintenance mode:
http://codex.gallery2.org/index.php/Gallery2:FAQ#How_do_I_prevent_users_from_accessing_my_site_during_maintenance_or_upgrades.3F