Source: http://androidforrookie.blogspot.in/2014/06/how-to-solve-insufficient-storage.html

Step 1: Download and install a File Browser which can access root files.
Step 2: Go to /data/app-lib/ directory. There could be a lot of folders.
Step 3: Select the folder(s) related to the app which gives you problem. In this case, I have to search for the folder(s) containing the name Clean Master.
Step 4: There could be more than one folder displayed with the app name. In this case, there are two folders com.cleanmaster.mguard-1 and com.cleanmaster.mguard-2 as shown in the below picture. Delete these folders. (Take a backup of these folders for safer side. Later you can delete if not required).
Step 5: After deleting successfully, restart the phone. Now you can update your app.

Source: http://forum.cyanogenmod.org/topic/94302-insufficient-storage-available/

log into terminal
su
cd /data/app-lib
chown system:system *

and that's it. no need to delete folders (which caused me to lose some application data in the past).

System Cleanup at Google Play