Not really. The original app is deleted, and the update is applied. It's an all or nothing process. You don't have to update, but more often than not, updates contain bug fixes. Occasionally, an update will introduce a bug. Once you update, there is no going back.
When iOS6 is released, look forward to a whole pile of updates, as apps are updated to take advantage of the capabilities of the new OS.
I also have a 16Gb iPad, and i try to keep around 1GB of free space.