You have to replace root.fs and initrd.img in your \ProgramData\BlueStacks\Android folder folder, BOTH those files must be replaced, when you do so however you will loose all your apps and things related to them so choose wisely
If that fails then uninstall Bluestacks completely (when it asks you if you want to keep your Android apps and data say NO, because if you dont it will not let you reinstall a version of Bluestacks other than you had, then reinstall Bluestacks and root it. You can get any version of Bluestacks that has been released from here (Offline installers ofcourse!
and theres several root files in this thread http://forum.xda-developers.com/show...298332&page=33
, dont forget to use the root files that have the same version as Bluestacks is.
And no, you cannot update the version of Android within Bluestacks unless you update Bluestacks itself, oh btw, Bluestacks recently released their ICS version! so now you dont have to be stuck with crappy Android 2.3! its been rooted even! (check that thread i linked for info about that and root files)