@grendelkhan  :

this helped, thanks

DON'T REBOOT!:
sudo chmod 444 /etc/init.d/hotkey-setup
then sudo /etc/init.d/hotkey-setup stop 

(if you can't open up another gnome-terminal / have closed gnome-terminal & 
gnome-panel crashed, just switch to tty2:
ctrl + alt + f2, then login and do the above steps)

for restarting / reviving gnome-panel:
killall gnome-panel

then switch back to X: 
ctrl + alt + f7

open up a new gnome-panel (alt + f2 -> gnome-panel)
sudo apt-get dist-upgrade

now update should continue

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Unable to upgrade to latest version
https://bugs.launchpad.net/bugs/88105
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