Hi,
The Update URLs function doesn't work that way. You usually either Purge URLs, which moves all URLs to trash. Or use the Update URLs, which takes all the URLs in database and updates them so their SEF representation matches the current configuration. Please refer to our JoomSEF documentation for more information:
www.artio.net/joomsef/documentation
EDIT: You can let JoomSEF automatically crawl your web site to generate SEF URLs automatically using the Crawl Website function in Extras Management tab in JoomSEF's Control panel.